A proposal to include an assessment of likely future performance of defined contribution (DC) funds risks masking poor actual performance, according to responses to the latest Value for Money framework consultation.
The Financial Conduct Authority’s (FCA) consultation process closed this week, as it continues to develop the proposed Value for Money (VfM) rulebook that the government hopes will strengthen and future-proof DC savings.
Pension providers and trade bodies have widely welcomed the proposed system, but several have flagged concerns over issues such as forward-looking performance metrics and the absence of collective defined contribution arrangements from the rulebook.
In its response, TPT Retirement Solutions argued that regulators needed to ensure that “forward-looking projections do not dilute accountability for poor performance”.
The FCA has previously asked for suggestions as to how forward-looking performance predictions could be incorporated into VfM assessments.
TPT said forward-looking metrics should not be given too much weight, with “realised member outcomes [remaining] the primary determinant of value”. This would ensure that providers do not attempt to mask poor performance by changing forward-looking assumptions.
Performance forecasts and ‘dry runs’
Ruari Grant, head of policy at TPT, said: “Schemes cannot be left to effectively mark their own homework, particularly when considering the current dispersion in member outcomes, and the commercial consequences that will flow from a VfM assessment.
“And, given the government’s wider consolidation agenda, under which VfM will become a key mechanism for determining what ‘good’ looks like, it is essential that assessments are driven by objective evidence of member value rather than subjective interpretation or narrative.”
Kate Smith, head of pensions at Aegon, agreed that past performance should carry more weight, and welcomed the FCA’s plan to “place more emphasis on actual customer outcomes and experience”.
The Society of Pension Professionals, in its response, recommended that the weighting of future projections in a scheme’s overall rating should be capped at 30%.
Smith said Aegon had “serious concerns” about how VfM was to be implemented, and urged the government to agree to a test phase “behind closed doors”.
“Just because there won’t be regulatory consequences [in VfM’s first year], it doesn’t mean there won’t be commercial and reputational damage consequences. All eyes will be on the published data and ratings, with the industry coming under immense scrutiny.”
Kate Smith, Aegon
The government has agreed to a delay to full implementation of the VfM system, with the first year only covering the largest schemes and master trusts and with no regulatory penalties being imposed.
“Just because there won’t be regulatory consequences, it doesn’t mean there won’t be commercial and reputational damage consequences,” Smith said. “All eyes will be on the published data and ratings, with the industry coming under immense scrutiny [and] information potentially taken out of context.
“This could be made worse if it turns out that there’s a lack of consistency in how trustees and providers have interpreted their VfM input data, which will influence the comparator data, and how default arrangements are assessed against this.”
The Association of Consulting Actuaries also raised this concern in its response, and called for a “dry run” led by the Pensions Regulator and Financial Conduct Authority for the first year.
“Data and assessment outcomes should remain unpublished during that first cycle, allowing issues with the metrics and comparisons to be identified before they influence the market,” the association said in a statement.
Address duplication and decumulation, regulators urged
Meanwhile, TPT also highlighted areas of potential duplication between the VfM framework and existing regulatory requirements, in particular the annual Chair’s Statement. It argued that this should be phased out as VfM is embedded in the pension system, as it “would be consistent with the government’s commitment to a more proportionate and outcomes-focused regulatory regime”.
Consultancy group LCP contended that the VfM proposal did not give sufficient consideration to employer support for pension arrangements, such as subsidised costs and other services for members.
Stephen Budge, partner in LCP’s DC team, said: “The revised Value for Money framework has the potential to improve outcomes, but there is a real risk that an overly narrow assessment becomes a distracting regulatory exercise rather than something that genuinely helps employers and trustees improve value for members.
“For engaged schemes, good governance already involves looking well beyond investment performance and charges to consider administration, communications, retirement support and the wider member experience. The framework needs to recognise that broader picture, as well as the value of employer support, if it is to drive better decisions rather than unintended consequences.”
Meanwhile, the Association of Member Nominated Trustees voiced concern that the VfM proposals had become “somewhat anachronistic” given the significant changes that have happened since VfM was first put forward by policymakers.
In particular, the trustee body highlighted that by the time the first VfM processes are in train, pension schemes will also be exploring and implementing guided retirement options, and potentially exploring different forms of collective defined contribution. This would require VfM to be adapted to be a “lifetime assessment, rather than just considering the accumulation phase”.
Pensions Expert has collated a range of responses to the consultation from across the pensions industry.
