Hoping for clarity on Value for Money

July brought a new – but widely expected – Labour government. It was quickly followed in August, in much the same vein, with the Financial Conduct Authority’s (FCA) consultation for a new, but anticipated, Value for Money (VFM) framework for workplace pensions.

The FCA isn’t ‘going it alone’ – far from it. The consultation continues an encouragingly collaborative approach with the Department of Work and Pensions and the Pensions Regulator (TPR).

While the FCA’s paper is quite rightly focused on contract-based pensions, it also seeks views on whether the proposals could be applied to the wider market, including trust-based schemes.

As reflected by the level of detail in the paper, which is a weighty tome at just over 200 pages, this is a complex matter.

However, while the Society of Pensions Professionals (SPP) believes that there are some significant early issues to address, we support many of the proposals being put forward and the overarching objective of improving value for members.

The value assessment will consist of three pillars: investment performance, quality of service, and costs and charges. Each of those will have its own specific measure and metrics.

Data, data, data

It is clear from the outset those will add up to a significant amount of data for, predominantly, independent governance committees (IGCs) to wrestle with.

This is compounded further with the proposal that IGCs must also choose three comparator arrangements from other providers. Keeping the amount of data down to a level that is both useful and of value is essential.

The FCA is alive to the issue and has made early attempts to be proportionate in its proposals. The challenge would appear to be where they can be trimmed down further.

It’s in this context that an area that will not form part of the value assessment sticks out like the proverbial sore thumb.

There are significant disclosures to be made around asset allocation, yet IGCs are not expected to take these into account when determining value.

The disclosures are there ostensibly to highlight firms’ investment approach and allocation to illiquid or UK-based investments.

There is a time and place for that information, but when it comes to trimming down data points this is perhaps an area that could result in the greatest ‘savings’.

There’s a sense throughout the paper that the FCA is genuinely open to ideas from stakeholders about how it should shape its proposals – none more so than the area of quality of service.

We believe this is the area that’s in need of most refinement – but that should come as no surprise as it is undoubtedly the toughest of the three pillars to measure.

Proposals around accurate data, maintaining members’ contact details, measurement of key financial transactions, and customer satisfaction surveys all have their individual foibles.

What they have in common is that they seem relatively straightforward but are difficult to execute in practice. We hope this is an area where the FCA engages further with stakeholders to develop its thinking.

Once all the data is out there, publicly available to all on providers’ websites, IGCs will need to deliver the ultimate aim of the framework: assess value for money.

Troublesome traffic light approach

The proposals put forward a red-amber-green solution, where green offers value but both red and amber do not.

The differentiator between red and amber would be that amber schemes are capable of being ‘turned around’ in a reasonable period of time.

In the SPP’s view, despite there being three indicators, the outcome is actually binary: value for money or not value for money. There is an overtly negative connotation on the amber rating.

If the FCA is committed to the red-amber-green solution, which has benefits in its simplicity and ease of understanding, this could be solved by making it clear that an amber rating means there is ‘room for improvement’.

With the ball back in the FCA’s court for now, we are hopeful that this is just the beginning of an iterative, collaborative process with legislators and regulators. 

Brian McBride is a member of the Society of Pension Professionals’ Financial Services Committee.