The Financial Conduct Authority (FCA) has published its consultation on a new value for money (VFM) framework for contract-based schemes. Under the proposed framework, schemes will be publicly rated red, amber or green based on a range of metrics to demonstrate how they perform on long-term value. This latest consultation is a continuation of work with the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR) to implement a consistent VFM framework across all workplace defined contribution (DC) schemes. Feedback from this consultation will inform legislative developments for trust-based schemes as part of the forthcoming Pension Schemes Bill, as announced in the King's Speech.
The proposed framework is designed to work in conjunction with the FCA's Consumer Duty obligations and will apply initially to default arrangements in the accumulation phase, subject to a membership threshold test. The main elements are:
- The measurement and public disclosure of investment performance, costs and charges, and quality of services. These metrics are largely unchanged from the joint consultation in 2023, although the FCA is not taking forward the inclusion of forward-looking metrics on investment performance at this time.
- A VFM comparison with arrangements offered by at least three other providers, with at least two of those having total assets above £10bn. Where data is available, a comparison should be made with contract-based and trust-based providers.
- A mandatory four-step VFM assessment process, resulting in a final determination of a red, amber or green rating.
- Ongoing notifications to the sponsoring employer and the FCA in the event of a red or amber rating (while poor value persists), including an action plan on how providers intend to address the poor value. A red rating means that ‘the arrangement is unlikely to be improved sufficiently to deliver VFM within a reasonable period of time'. The FCA states that providers “must consider transferring affected savers from the in-scope arrangement into an alternative arrangement that provides value”, albeit recognising that this may be difficult to achieve in practice for contract-based schemes, given the current legislative barriers to bulk transfers without member consent.
Providers must publish all framework data by 31 March each year, using data collated up to 31 December of the previous year. Independent Governance Committees (IGCs) must then use this data to conduct and publish VFM assessments by the end of October. The FCA proposes to extend the content of the IGC's annual report in line with the new VFM framework.
The FCA expects ‘third-party league tables' to emerge naturally as the framework data becomes available, which will stimulate further competition. It also suggests exploring how VFM information could feed into the pensions dashboards to support members.
In addition to the above, the FCA's consultation document also proposes to require the public disclosure of asset allocation for ‘in-scope' arrangements, with a split between UK and non-UK assets. (Most DC trust-based schemes are already subject to asset allocation disclosures, albeit the split is optional.) The FCA defines UK asset types – for example, for listed investments, “UK assets should include all those with a primary listing on a UK market and constituents of UK market indices.” This shift follows the previous Government's announcement to boost investment in UK businesses. This disclosure does not form part of the VFM assessment or rating.
The consultation closes on 17 October 2024. In a press release, TPR states “We encourage trustees of trust-based schemes to respond to the technical detail of the consultation, with a view to ensuring the final framework can be applied effectively to trust-based schemes.”
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