Regulators propose ‘red-amber-green' Value for Money framework

The Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) last night unveiled a consultation into the structure of the framework, including a traffic light system for reporting value for money.

The regulators, working alongside the Department for Work and Pensions (DWP) have also proposed standardised metrics to improve comparability between DC schemes.

While the framework initially only covers FCA-regulated contract-based DC arrangements, legislation is expected to bring trust-based DC schemes into scope. TPR urged DC trustees – particularly those overseeing master trusts – to engage with the framework and adopt it early.

The framework will assess schemes on three main areas: investment performance, costs and charges, and the quality of service provided to members.

Proposed service quality metrics include: transaction security, efficiency and accuracy; user satisfaction; support for decision-making; ease of use; and engagement. However, the regulators have asked for industry input on other potential measures.

On investment performance, schemes will be expected to disclose three figures: returns net of transaction costs, returns net of investment charges, and performance net of all charges. These figures should be provided for one, three and five-year periods, with 10 years and 15 years if available. The regulators also expect reporting to be split by retirement cohort.

Under the proposed framework, costs would be broken down into service costs, investment charges, and an overall total, with the same timeframes as investment performance disclosures.

Traffic light system

Each of the three areas will be rated red, amber or green according to an annual assessment by each scheme’s independent governance committee or other governance body. Ratings will be made public.

Those rated amber will be given up to four years to address problems and improve their rating. Those that are rated red – defined as not being able to deliver value for money in a “reasonable period of time” – will be required to close to new business and transfer members to an alternative arrangement with better ratings.

The consultation paper stated that the regulators expected the pressure on firms brought by this new reporting regime would “start to drive competition based on value, rather than predominantly cost”.

Schemes will also be expected to compare themselves with others, and the consultation set out guidance for how governance bodies can effectively select appropriate comparisons.

Sarah Pritchard, executive director of markets and international at the FCA, said in her foreword to the consultation: “The proposals in this paper will tighten scrutiny of default arrangements and address underperformance.

“They will boost competition in the interests of pension savers by focusing attention on metrics that matter to retirement outcomes. They support the operation of the Consumer Duty by requiring contract-based pension providers to put consumers at the heart of firms’ decisions, by giving providers the information they need to compare propositions on value.”

Trustees urged to engage

Feedback to the consultation will inform the direction of legislation, the regulators said, including elements of the Pension Schemes Bill.

The government has already set out plans to bring TPR-regulated schemes – including DC master trusts – under the scope of the framework, which currently only applies to FCA-regulated contract-based schemes.

TPR called on trustees to engage positively with the consultation process to ensure the framework can be applied accurately and fairly to trust-based DC schemes.

Nina Blackett, executive director of strategy, policy and analysis at TPR, said the framework would “deliver a consistent way to assess and compare the value delivered by both trust-based and contract-based DC schemes, improving transparency, consistency and competition”.

Nausicaa Delfas, TPR chief executive, added: “We want every pension saver to get value for money from their pensions. That means good investment returns, and high-quality services, for a competitive price. This is a great opportunity for the pensions industry to help to transform pension saving for millions, and to deliver greater value for their retirement.”

Pensions minister Emma Reynolds said the Value for Money framework would “lay the foundations” for the Pension Schemes Bill and the Pensions Review and the government’s work to “make pensions fit for the future”.

“I would encourage responses from across the industry, including trust-based schemes, to this consultation,” she added.

Further reading

Smaller DC schemes urged to swot up on value for money assessments (5 July 2023)

Poor performing schemes to face new business ban (4 March 2024)