Value for Money plans not set in stone, say regulators

Speaking at the Pensions and Lifetime Savings Association’s Annual Conference in Liverpool yesterday (16 October), the Pensions Regulator’s (TPR) interim executive director of strategy, policy and analysis Nina Blackett said “nothing is set in stone” regarding the proposed framework.

The Financial Conduct Authority’s (FCA) head of asset management and pensions policy Nike Trost added: “What we are clear about is that we are making a framework that will drive action. It should be simple. It doesn’t necessarily need to be red-amber-green.”

The regulators said they wanted Value for Money to form a “bedrock” for the industry but said it would be flexible and adaptable as needed. This was particularly important for hybrid and complex defined contribution schemes, Blackett added, which could require more “contextualisation” to demonstrate good value.

The FCA and TPR are working with the Department for Work and Pensions to develop the Value for Money model for defined contribution schemes.

In August, they proposed a traffic light system for assessing value. 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”.

Addressing delegates, Blackett said the regulators were “looking for simplicity” in the framework, but emphasised that they were eager to get feedback from as many stakeholders as possible.

She added that TPR had already seen results from its initial work on Value for Money with small schemes.

“By asking the question about how they deliver value, 17% decided they are not and have chosen to wind up,” Blackett said. “They are acting in the best interests of members.”

Demand for nuance

The consultation on the Value for Money framework closed today (17 October), with companies and organisations calling for more nuance in the scale used by the regulators to indicate good value.

Patrick Luthi, chief executive officer at NOW Pensions, said: “Introducing a more nuanced assessment framework beyond the current three-tier red-amber-green system will ensure the right balance between competition and regulatory oversight, protecting members while fostering market growth.”

Elizabeth Hartree, director and head of defined contribution at LawDeb, warned that the current proposal “has the potential to risk driving provider behaviours that, in our opinion, are not in the best interests of savers”.

The red-amber-green model as planned could result in providers seeking to avoid an amber rating “at all costs”, Hartree added, which could reduce provider appetite for innovation or investment in private markets due to higher costs.

“Furthermore, if employers act quickly to move away from ‘amber’ rated arrangements, there is the risk of a ‘run’ on the arrangement which could terminally damage the provider and, ultimately, damage value for the remaining members,” she said.

Steven Cameron, pensions director at Aegon, said the move from green to amber as currently designed presented a “commercial cliff edge” for pension providers.

He called for an additional rating between green and amber to indicate “scope for improvement without the need to close to new employers”.

“Without this, the cliff edge will encourage a herd mentality for fear of underperforming peers,” Cameron argued. “This, in turn, could run counter to government objectives to encourage investment in new asset classes including private assets.”

Further reading

What the regulator wants from the Value for Money consultation (29 August 2024)

Regulators propose ‘red-amber-green’ Value for Money framework (8 August 2024)

Industry casts doubt on elements of Value for Money framework (8 August 2024)