The pensions industry has broadly welcomed the new Value for Money (VFM) approach outlined in this week’s consultation set out by the Financial Conduct Authority (FCA).
The regulator has shifted from a ‘traffic light’ rating system to a four-point approach, with two ‘value’ and two ‘not value’ categories, based on measures of investment performance, costs, and service quality.
The FCA has proposed the introduction of forward-looking performance forecasts as well as historic performance records, while other changes include a 10-year time horizon for returns reporting rather than the previous 15 years.
“Ambition must match reality: schemes face heavy pressures, and added burdens must stay proportionate.”
Helen Forrest Hall, Pensions Management Institute
Helen Forrest Hall, chief strategy officer at the Pensions Management Institute, said the new framework was “a positive step towards better saver outcomes” and welcomed the streamlined approach from the FCA, which has reduced the number of data points it wants defined contribution (DC) schemes to report.
FCA approach ‘encouraging’
Forrest Hall also described the new four-point rating system as “a win for fairness and competition”.
She added: “Ambition must match reality: schemes face heavy pressures, and added burdens must stay proportionate. Clear communication will be critical to avoid confusing members.
“We will work with government and regulators to ensure the rules are practical, consistent across schemes, and deliver long-term value for savers.”
Lydia Fearn, co-head of pensions consolidation at LCP, said it was “encouraging” that the regulators had taken industry concerns into account through the four-point rating, which she contended would “provide greater nuance”.
“The consultation also recognises the need for the framework to evolve over time, which will be essential to ensure it remains relevant and robust,” Fearn continued. “Ultimately, it is vital that the framework is proportionate and focused on supporting good member outcomes, which must remain the central objective.”
Emma Douglas, wealth policy director at Aviva, said: “These proposals could be a game-changer for pension savers by making sure their money is working harder for them, providing clearer information and greater confidence that their retirement savings are being managed with their best interests in mind.”
Forward-looking metrics
The inclusion of investment performance forecasts was particularly well received. The FCA has set out different options for how these could be incorporated into the overall VFM assessment.
Louise Davey, head of policy and external affairs at professional trustee firm Independent Governance Group, said: “A robust and consistent framework for measuring value for money is key to ensuring DC schemes deliver good value on hard-earned savings.
“We welcome the further details on the framework from the regulators, particularly the recognition that backwards-looking metrics are wholly unsuitable for private market investment on their own, and focus has now shifted towards more appropriate forward-looking measures.”
She added that the four-point rating system “should enable a higher degree of nuance within the framework to assess value for money”.
Gail Izat, workplace managing director at Standard Life, said: “As we all know, past returns are not a guarantee of future returns, and so outlining expectations for the future is a helpful addition.”
Alison Leslie, head of DC investment at Hymans Robertson, added that the forward-looking metrics were “essential as part of the value for members assessment”.
Quality of service measures
Some commentators called for more focus on service measures, which in the consultation paper primarily include administration and communication considerations.
“A credible approach [to service quality assessment] requires objective, measurable indicators rather than vague notions of ‘good administration’.”
David Brooks, Broadstone
Standard Life’s Izat said: “We would have liked to see greater emphasis on service measures, which, as currently envisaged, can maintain or downgrade but not improve a provider’s rating.”
David Brooks, head of policy at Broadstone, warned that agreeing on what good service is and how to measure it would be “a real challenge”.
“The FCA’s consultation makes clear that service quality must sit alongside performance and cost, but it stops short of defining a final metric set, leaving the industry to help shape it,” Brooks said. “A credible approach requires objective, measurable indicators rather than vague notions of ‘good administration’.”
He argued that service quality should be measured across operational accuracy, timeliness, complaints handling, and the member experience.
“To meaningfully compare schemes, these metrics should be standardised, publicly disclosed, and benchmarked across the market – just as costs and investment performance already are,” Brooks added. “Only with that level of consistency will VFM assessments reflect the true quality of the service members.”
Philip Smith, DC director at TPT Retirement Solutions, said VFM would be a “vital tool to hold schemes to account, so that members benefit from effective scale, driving greater efficiency, governance and innovation”. He called for the framework to be extended to include guided retirement offerings once these start to become available.
