TPR, FCA to push for ‘consistent and structured’ approach to VfM

The regulators jointly published a discussion paper on the new framework in September 2021 advocating a more “holistic approach” to value for money, to be achieved in part by encouraging greater transparency in data disclosures and including information on investment performance and customer service.

The Society of Pension Professionals criticised the paper at the time, branding it “utopian”.

A few simple metrics won’t necessarily bring a level playing field for all DC members. It is vital that the focus is not just on cost but on long-term member outcomes

Laura Andrikopoulos, Hymans Robertson

Speaking at a Pension Playpen event in May, pensions minister Guy Opperman said he was in favour of the regulators’ proposals and suggested that the Department for Work and Pensions would be taking the lead on the new framework, to be designed along broadly the same lines. 

In a feedback statement published on May 24, TPR and the FCA said a focus on cost had been necessary in the early days of auto-enrolment, but that now an “excessive focus” on costs and charges risked “other key elements of value not being given appropriate consideration”.

“The focus on true long-term value is important for the ‘double defaulters’ of automatic enrolment. Automatic enrolment has brought over 10mn people into pension saving, most of whom have made no choice to save or about where their money is invested,” the regulators explained.

“These people depend on their pension scheme or provider to make the right choices for them. For this reason, we think that those responsible for providing oversight of value should be supported in their focus on what matters most for pension saver outcomes. These are investment performance, service and oversight, and costs and charges, with the level of contributions a separate but equally important consideration.”

They re-emphasised the importance of transparency, arguing that an effective value for money framework would be one under which members and providers could more easily compare their pension offerings.

The regulators also suggested that they would look to learn from other countries’ approaches about the best way to achieve this, mentioning Australia’s league table model specifically.

“Our VfM framework must work across all DC pensions, both workplace and non-workplace. However, our approach will be phased, taking into account the challenges of extending the framework more widely,” they said. 

“At this stage, we are focused on VfM in accumulation in workplace schemes, and in particular default arrangements. We will consider further how best to extend the framework to self-select options in workplace schemes and to non-workplace pensions, as well as to pensions in decumulation. 

“We remain convinced of the view that there is value in enabling consistent comparisons of VfM across all types of DC pension schemes, which will support engaged pension savers in making decisions about whether and how to transfer or consolidate their pension savings.”

The feedback

The feedback statement cited broad support for the idea of a holistic approach in assessing value for money, and likewise its calls for more transparency and greater availability of data, but noted that there was “less consensus on how to measure each of these elements”.

The suggestion of benchmarking value for money elements separately was met with a mixed reception, due to the “complexity of developing benchmarks that can adequately account for the wide differences in scheme characteristics and investment objectives across the market”, the statement noted.

“Where possible, these respondents were keen that regulators carefully consider whether there is scope to rationalise existing requirements rather than introduce new ones,” it stated.

Disclosing data around investment performance was similarly welcomed in theory more than in practice, there being mixed views about whether, for example, investment performance should be disclosed net or gross of costs.

There was also disagreement on reporting periods, metrics and the use of benchmarking generally.

Similarly, on the incorporation of customer service into the holistic framework, there was broad support in theory but concerns about how it would translate into reality, with some worried that simply measuring a minimum standard of customer service would encourage a “race to the bottom”.

Views were likewise mixed on whether the regulator should develop customer service standards or leave that to the industry, and on how comparability is to be achieved in practice.

“The number and quality of responses have given us a foundation to advance our consideration of the issues raised in the discussion paper. However, there are a number of areas where there is no clear consensus as to the way forward,” the regulators said. 

“We will continue to develop our thinking on how to address these issues and consider which metrics schemes should be disclosing to facilitate more effective VfM assessments by professional audiences, such as [independent governance committees], trustees and employee benefit consultants. 

“We also need to consider how this disclosed information could be adapted to assist engaged savers in choosing self-select options and non-workplace pension products.”

They added that they would look to consult on the value for money framework later this year. Opperman has previously suggested November would be a realistic date.

The feedback to the feedback

The regulators’ feedback document was itself met with broadly positive feedback from industry figures.

Aegon pensions director Steven Cameron said: “We welcome the move to greater consistency in the broader measurement of value for money across workplace and, in due course, non-workplace pensions. We hope this strikes the right balance between data analysis and using the expert judgment of IGCs and trustee boards.

“However, it’s critical that there is consistency with the ‘price and value’ elements of the FCA’s new consumer duty, which will apply to contract-based workplace pensions and non-workplace pensions.

“The FCA’s current deadline for complying with the new consumer duty is April 2023, which risks possible divergence if the joint FCA/TPR framework will be subject to further consultation towards the end of this year,” he cautioned.

Philip Brown, director of policy at B&CE, provider of The People’s Pension, likewise welcomed the feedback statement, agreeing that “scheme selection in the workplace pensions market now turns too much on charges and too little on the value that different pension schemes offer”.

He said: “Charges matter but outcomes matter more. Rigorous value for money metrics will enable those choosing pension schemes to better gauge which schemes will deliver good outcomes for members.”

Laura Andrikopoulos, head of governance at Hymans Roberson, warned against an “overly simple approach”, however, which she warned “may give misleading impressions of value”.

“For example, lower costs but a poorer-quality investment strategy and little flexibility at retirement do not necessarily represent better member outcomes or value than a higher-cost scheme,” she said. 

“A few simple metrics won’t necessarily bring a level playing field for all DC members. It is vital that the focus is not just on cost but on long-term member outcomes.”