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The Financial Conduct Authority and the Pensions Regulator are inviting views on a holistic framework and metrics to assess and annually report on value for money in all defined contribution schemes.
Three key elements
The FCA and TPR – which among others regulate DC schemes managing £728bn for 30.7m savers and £218bn for 18.2m savers respectively – define value for money in DC as “well-run schemes delivering good investment performance that is not eroded by high costs and charges”.
The regulators look after contract and trust-based DC schemes under different regimes, but have aimed for closer collaboration in recent years. In a new joint discussion paper, they are now proposing a common framework for disclosing information on net investment performance, scheme oversight - including data quality and communications - and costs and charges, with the latter building on existing requirements. They are not proposing a separate ESG assessment but want to see this as part of investment design and communications. Source: TPR/FCA The FCA said that while the current discussion paper is focused on assessing value in accumulation, it intends to consider the assessment of value for money in decumulation after it has conducted a post-implementation review of investment pathways.
Views on the open discussion paper are invited until 10 December. A feedback paper with next steps is planned for 2022.
‘Every penny counts’
Consumers work hard for their pensions savings, making it important that schemes deliver good-value products, said Sarah Pritchard, the FCA's executive director for markets.
“'This issue is a complex one which impacts almost all pension savers so it’s important that we get it right. The proposals will help all those making decisions on behalf of consumers really challenge providers on value and allow better comparisons between products,” she said.
David Fairs, TPR’s executive director for regulatory policy, analysis and advice, stressed that regulators, industry and others must be able to effectively assess value for money to ensure good outcomes.
“DC savers rely on the pension system working as best as it can over the lifetime of their saving - every penny counts. That's why independent governance committees and trustees need a framework which provides a holistic assessment of what VFM means - beyond cost and charges - to allow them [to] hold their providers to account and deliver the best possible outcomes for savers,” Fairs said.
Public disclosures ‘a starting point’
The new common framework intends to allow trustees and independent governance committees to compare their scheme with similar offerings from other providers on these measures, thereby creating greater competition. They will be expected to assess and report on the three core elements of performance, oversight and costs and charges on an annual basis, with the regulators expecting the data to be made public.
The regulators concede that requiring additional public disclosures would come at a cost which would be borne by schemes and their members, saying the measuers will need to be proportionate, but they stress that poor value over the longer term is also very costly to schemes and their savers.
“We want to gather information that will enable us to design requirements that strike a balance between initial costs and long-term savings,” the paper states.
The regulators admitted that disclosures alone will not address “the difficult issues” surrounding value for money in pensions but described them as “a starting point”, adding that they will continue to work with stakeholders to improve saver outcomes over the longer term.
How does discussion paper sit with DWP proposals?
The Department for Work and Pensions has itself been pushing for value for money assessment as part of its drive to get DC schemes to consolidate – with the hope that this will lead to more long-term illiquid investment, supporting the current government’s ‘building back better’ and ‘levelling up’ agendas.
It mandated that from next month, schemes below £100m will have to undertake a detailed value for member assessment; those that do not offer value must explain what they will do to improve and consider consolidation.
Earlier this year, the DWP also astonished some in the pensions world by publishing a call for evidence on extending this requirement to schemes between £100m and £5bn to further incentivise consolidation, potentially bringing most of the DC market into scope. The call for evidence closed in late July, and TPR and the FCA said that responses to that DWP paper will help to inform their value for money work.
Industry was not enthused by the DWP’s proposals; last month, the Pensions and Lifetime Savings Association reacted to the extension of the requirement to large schemes by saying that there has been “little evidence to support the suggestion that the benefits to members of extensive consolidation would outweigh the costs involved”, while provider Aegon urged the government to put these plans on hold.
What are your thoughts on the value for money reporting proposed by FCA and TPR?
