DC pension scheme ‘value for money’ framework moves closer

The Department for Work and Pensions (DWP), the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR), set out the key metrics, standards and data disclosures that will comprise the VFM framework on 11 July in their joint response (84-page / 628KB PDF) to an earlier consultation it held with industry on the proposals.

The new framework is designed to enable like-for-like comparisons between DC schemes via a grading system. Scheme providers will either be rated as giving value for money; not currently giving value for money, with identified actions to improve; or as failing the VFM test.

To inform grading, DC scheme providers will be obliged to obtain, publish, and then assess data concerning investment performance, costs and charges, and quality of services in what will be a major disclosure and compliance exercise. A mandatory step-by-step assessment process has been set out by DWP and the regulators.

Underpinning the new regime will be powers of enforcement – a suite of regulatory tools will be developed, to ensure schemes conduct appropriately-reasoned assessments and broader compliance. The TPR is to be given powers to enforce wind up and consolidation where a scheme is consistently not providing value for its members.

Many of the framework proposals will require primary legislation, however no firm date has been set for the legislation to be introduced into parliament. Further details on phasing, the types of schemes in scope during each phase, and other elements of the framework, are to be set out in secondary legislation and future consultations

Pensions expert Tom Barton said the VFM framework will bring reform to the ‘charges and governance’ regime that applies to occupational pensions and accelerate the trend of consolidation of DC schemes, highlighting the “high volume” of bulk transfers to master trusts already occurring in the market.

“That focus on consolidation/scale is not just about value – it is about greater investment opportunities and the potential to deliver better outcomes,” Barton said. “The proposals therefore lay down a gauntlet to schemes and providers to evidence how their arrangements are benefiting from scale, including their ability to invest in diversified investment strategies that deliver long-term value for savers. This is all part of a wider push towards illiquid investments.”

The DWP and the regulators said they will carefully explore legislative changes to enable personal pension providers to transfer pension savers without consent, internally or to another provider, with appropriate protections built into the process. Barton said that without-consent bulk transfers from workplace personal pension schemes has been the subject of industry debate.

“We can see the logic for measures to help with value and address difficulties with legacy/heritage books in the FCA regulated space,” Barton said. “It looks like the new Consumer Duty is expected to fill the gaps for non-workplace schemes, pending any VfM framework for the time being.”

One aspect of the charges and governance regime being reformed via the VFM framework is the phasing out of the chair’s statement – this is the statement the chair of trustees is required to prepare that confirms how the scheme is meeting the governance standards that apply under that regime.

Barton said: “It seems unlikely anyone will be sad to see the end of chair’s statements. There is a lesson here for wider public reporting requirements too: the harder you try to follow compliance requirements, the less engaging it all gets for members. These disclosures are really for the benefit of industry and regulators. With these disclosures, schemes and providers should not be ashamed to just follow the flow of compliance requirements in legislation. That way they can be sure they are delivering on the policy objective too. The artistic licence and member messaging can be reserved for non-mandatory materials which are not accompanied by penalties for compliance breaches.”

The DWP and the regulators further confirmed that they do not expect savers to be in an underperforming scheme arrangement for more than two years, unless extenuating circumstances apply and can be clearly demonstrated.

In a joint foreword to the recent response paper, Mel Stride, UK pensions secretary, Laura Trott, pensions minister, Louise Davey, director of regulatory policy, analysis and advice at the TPR, and Sarah Pritchard, executive director of markets at the FCA, said: “We want trustees, providers and Independent Governance Committees IGCs to use the framework to ask themselves tough and challenging questions. Do we have the scale and expertise needed to access better outcomes? Can we compete with the biggest and best schemes in the market? Is my investment strategy diversified and seeking to take advantage of the full range of asset classes, such as, infrastructure, private markets, and venture capital that have the potential to deliver higher returns for savers?”

“We believe that standardised, consistent, and transparent data and assessment can drive real improvements and create the sea change in thinking that is needed in the pension sector, encouraging competition, driving good schemes to get better, and requiring poorly performing schemes to exit the market. Backed with new strong powers to ensure schemes comply, our proposals are a vital part in ensuring that we have a regime that is ready for the challenges of the future and one that truly delivers for savers,” they added.