Industry casts doubt on elements of Value for Money framework

The Financial Conduct Authority (FCA) and the Pensions Regulator have set out proposals for a new Value for Money framework, requiring DC schemes to publicly disclose metrics connected to investment performance, costs and service quality.

Schemes would be compared to other similar peers and rated red, amber or green depending on how well they measured up. Amber funds would have up to four years to rectify issues, while red funds would be banned from accepting new business and be forced to transfer members to a better alternative.

Tom McPhail, director of public affairs at The Lang Cat, said: “The adoption of the red-amber-green traffic light system may be seen as overly simplistic for what are a complex array of scheme metrics.”

Steve Watson, director of policy and research at the NatWest Cushon master trust, agreed, adding: “We welcome better communications to members and an accessible value for money framework, so this traffic light system on value for money could provide a source of clarity in the industry. But it does run the risk of oversimplifying a complex topic because value means different things to different people.”

Minimal short-term impact

Jon Greer, head of retirement policy at Quilter, argued that the impact of the changes was “unlikely to move the dial a tremendous amount in the short term”.

He explained: “Currently, the majority of pension savers are already enrolled in large, well-managed master trusts or contract-based workplace schemes that have significant oversight and stringent charge requirements. These schemes are already subject to rigorous standards and transparency through existing governance requirements.

“Therefore, while the new framework might lead to further consolidation of smaller schemes, it is unlikely to result in a significant step change for the industry as a whole in the short term.”

Instead, Greer said the success or otherwise of the framework would depend on whether it can improve outcomes for pension savers.

Laura Myers, partner and head of DC at LCP, voiced concern that high quality single employer DC trusts may compare poorly to master trusts and so be forced out of the market unfairly.

“It is important that the government does not focus on size for size’s sake,” she said.

Myers also warned that schemes could become overly cautious due to the fear of being given an amber rating, which could then lead to “herding of investment strategies rather than rewarding schemes which are willing to innovate and invest for the long term”.

Productive finance

Tom McPhail, director of public affairs at The Lang Cat, said there was “a lot to like” in the consultation but warned that linking it to the productive finance investment goals of the government would be difficult.

Steve Watson, director of policy and research at the NatWest Cushon master trust, agreed, adding: “Given the new government’s focus on productive finance, which has the potential to boost growth and deliver higher returns, it is also important this framework isn’t too heavily focused on costs and past performance.

“If these two metrics carry too much weight, they could inadvertently drive ‘middle of the road’ investment strategies that exclude more expensive assets like unlisted equities.”

The FCA consultation includes a section outlining new requirements for asset allocation disclosures, including specific references to UK assets – in line with a plan set out by former chancellor Jeremy Hunt earlier this year.

However, the disclosures are not a direct part of the Value for Money framework. Instead, the regulator said they were designed to help schemes understand sources of returns and make improvements to investment strategies.

Forward-looking metrics

The consultation paper focuses only on backward-looking metrics as these are easier for schemes to measure and disclose, the regulator said. However, some people were disappointed that there were no proposed forward-looking metrics.

The Lang Cat’s McPhail said the regulator had missed an opportunity to “develop an interesting and innovative approach to investment decision-making”.

NatWest Cushon’s Watson added: “To not include them may push schemes away from those productive UK assets the government wants pensions to pursue and again drive pensions towards a middle ground.

“We recognise the risk with forward-looking metrics, but… there are ways around those potential issues.”

The FCA said it was open to considering forward-looking metrics if any were suggested through the consultation process.