From concerns over forward-looking metrics to calls for the framework to be expanded into decumulation, there has been a huge amount of feedback on the latest Value for Money consultation. Pensions Expert distils the main talking points.
For several years, the Financial Conduct Authority (FCA), the Pensions Regulator and the Department for Work and Pensions have been drafting and redrafting the Value for Money rulebook to construct a system that will not only allow defined contribution (DC) savers to compare their scheme with others, but also protect them from being stuck in poorly-performing arrangements.
The system, which spans contract-based and trust-based DC models, will assess schemes on performance, costs, service quality, and other factors to produce a simple colour-coded rating, ranging from poor value ‘red’ to ‘dark green’ top performers.
Those graded ‘red’ will be subject to closure, with rules in place through the Pension Schemes Act allowing bulk transfers to ensure this can be done efficiently.
Getting the Value for Money (VfM) assessment framework right is crucial, and it seems that even after several iterations, many industry commentators remain unconvinced by what the regulators have produced.
Metrics and forecasts stir controversy
Chief among the concerns cited by respondents to the FCA’s consultation, which closed this week, was the use of forward-looking performance metrics. Several groups had lobbied for this to be included in VfM assessments, but many now seem concerned that too much emphasis will be placed on forecasts rather than realised performance.
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%.
“Without the right guardrails, it’s all too easy to paint an overly optimistic picture of returns on some pensions, particularly those with exposure to more opaque private markets… We don’t think forward-looking metrics belong anywhere near a genuine value-for-money assessment, not least because we think there’s direct tension with the FCA’s own Consumer Duty.”
“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… It is essential that assessments are driven by objective evidence of member value rather than subjective interpretation or narrative.”
More time needed to get implementation right
The timing of the implementation of VfM is also subject to debate among respondents. Pensions minister Torsten Bell announced a delay in July, pushing the first reporting period back to 2028, but he emphasised that the government would not allow the overall policy to “drift”.
Under the current proposals, the VfM framework will launch in 2028 with initial assessments limited to larger schemes, while smaller schemes will not be required to complete full assessments until 2029. Consequences such as closing schemes to new members if they underperform will be held back in the first year.
However, some providers remain concerned that the impact of the assessments could have significant effects before VfM has been adequately tested.
Kate Smith, head of pensions at Aegon: “Just because there won’t be regulatory consequences, 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 [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 Pensions Administration Standards Association also called for providers to be given sufficient time to “build and test systems, establish appropriate governance, and implement robust data collection and reporting processes”.
In its response to the consultation, the association stated: “Arrangements should have a reasonable opportunity to demonstrate improvement where concerns are identified, while persistent poor value must be addressed consistently and fairly.”
“Getting the foundations right will be critical. The final framework should prioritise the metrics that are most meaningful, comparable and useful in assessing value, while avoiding additional complexity that does not materially improve outcomes for savers or employers. “In our view, the first year should operate as a genuine dry run, giving schemes, trustees, providers and regulators the opportunity to test data, address inconsistencies and build confidence in the methodology before ratings and assessments are made public.”
“The Value for Money framework has the potential to improve outcomes for millions of pension savers. [It] will only deliver if there is meaningful comparison between schemes. To achieve this, there needs to be consistency in how rules are interpreted, data is provided, and assessments are carried out… The industry and regulators need to use the implementation period to make sure everyone is working to an industry-wide approach before data is made public and those consequences take effect.”
Herding, outcomes, and investment: other key concerns
Despite the many iterations of the rules and multiple consultations, there were several other significant concerns raised by providers and consultants.
Mark Futcher, head of DC and financial wellbeing at Howden, warned that the framework “risks replicating the unintended consequences seen in Australia, where similar regulation led to herding into a narrow range of investment strategies, suppressed innovation, and ultimately less favourable long-term outcomes for savers”.
“The design of the framework will be critical. There is a fine balance, which the DWP must tread, between increasing transparency and creating incentives that unintentionally encourage schemes to converge on similar investment approaches. This must be offset with innovation alongside a spectrum of strategies available to members.”
DC savers need to be at the centre of the developing framework, respondents emphasised. This meant a focus on clarity and consistency as well as a focus on keeping the system efficient so as not to create too much extra reporting work for schemes and providers.
“We are in real danger of losing the wood for the trees. Members want to know if they have invested in a good or a poor pension product. The framework needs to be able to answer that question without members having to go to night school to learn financial figures for non-financial people.”
“Everyone wants pension schemes to deliver value for money. The test is whether regulation helps savers achieve better outcomes or simply creates more process… We should be careful not to confuse measuring value with delivering value. The focus must remain on better outcomes for savers, not more administration for schemes.”
“Value for money extends well beyond investment performance and charges. The quality of service members receive, whether they understand their pension and retirement choices, and whether they can act on that information are all fundamental to good outcomes. Getting those measures right will be critical if the framework is to give trustees better information, raise standards and ultimately improve members’ retirements.”
“Value for Money should not become a box-ticking exercise or drive schemes towards a one-size-fits-all approach. The framework needs to recognise different scheme structures, member needs and retirement strategies, while ensuring that the costs of compliance remain proportionate to the value it delivers.”
Achieving the VfM ambition
For most respondents, the ultimate goal of the Value for Money project is one worth pursuing: improving transparency and consistency across the pensions market, and ultimately moving towards better retirement outcomes.
“We welcome the recent progress that has been made in developing a more consistent approach to assessing value across the DC market… It would be helpful to have further clarity on the final requirements as soon as possible, so that the industry can start to prepare for the new VfM duties and plan its resourcing needs over the next couple of years.”
“There is a lot of work to do to give schemes the clarity they need to build, test, and implement the changes in time. The only viable approach is for government, regulators, and industry to work in genuine partnership and at pace… If we want pension schemes to play a greater role in driving the UK economy through long-term investment – and we do – they need the confidence to make those investment decisions with a clear understanding of how they will be assessed.”
“We support the government’s ambition to strengthen the pensions market and improve outcomes for savers through the Value for Money framework. By increasing transparency and supporting fair and meaningful comparisons between schemes, it has the potential to help savers, employers and trustees better understand the value different schemes deliver, looking beyond costs alone.”
