Will FCA's new VfM rules improve member outcomes?
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The Financial Conduct Authority has introduced new rules around value for money which are in force immediately. They require independent governance committees to assess their provider’s product against similar offerings. Are there practical hurdles to implementing the requirements?
Defined contribution was, for a long time, a sector that flew somewhat under the regulatory radar aside from mandatory fines for chair’s statements. This is rapidly changing with both the FCA and Pensions Regulator sharpening their focus on value for money and saver outcomes in their joint strategy.
Better governance at last for GPP members?
On the trust-based side, schemes have had a voluntary framework to assess value for money since 2016, and those with less than £100m are, as of this month, having to consider winding up as part of new mandatory value for money assessments.
Last month the FCA published a joint discussion paper with the Pensions Regulator, testing the mood around prescribing standardised metrics or benchmarks for value for money.
The value for money debate in defined contribution goes back at least to 2013, when the Office of Fair Trading found that competition alone would not lead to good outcomes in DC because of a weak buy side and high complexity.
VfM and comparison rules in force immediately
In a consultation in mid-2020, the FCA had proposed a definition of value for money alongside the three main elements it wanted an IGC or governance advisory arrangement to take into account in assessing value for money: costs and charges, investment performance and quality of services. It has now introduced its proposals as final rules.
Crucially, the new rules require IGCs to compare their provider’s offerings with other, similar propositions on the market as part of the assessment.
Under the new rules, schemes will have to:
- Take into account 3 key elements of VFM: costs and charges; investment performance; and services provided (including member communications).
- Assess and report on VFM, particularly through comparison with other options on the market.
- Consider, as far as they are able to, whether an alternative scheme or schemes would offer better VFM and inform the pension provider or the pathway investment provider if so. If the IGC is unsatisfied with the pension provider’s response, the IGC should also inform the relevant employer where this could make a difference to the outcome of members of the scheme.
- Set out their overall assessment in their reports about whether the scheme or pathway investment provides VFM.
- Explain how they have assessed VFM in their reports and keep relevant evidence they relied upon for at least 6 years.
The rules came into force on Monday, when they were published.
IGCs allowed to group employers into cohorts to carry out comparisons
According to the FCA, the most significant issue raised in the feedback to its consultation was around the level at which comparisons should be conducted. It said that to address these concerns, “our final rules allow IGCs some flexibility to decide how best to conduct the comparison”.
In practice, this means IGCs can group different employers into cohorts based on criteria that are commonly used to price, such as contribution levels or size of membership, said director at trustee firm PTL, Colin Richardson.
“The final detail as published is roughly as expected,” he said. However, even with the concessions that have been made to industry, some of the new requirements will not be straightforward in his view. “The objective the FCA is trying to achieve is supported - shining a spotlight on value for money - but the requirements are quite onerous,” said Richardson.
He said for IGCs that have tens of thousands of employers, it could be difficult to do assessments for each employer. In response to this concern, the FCA has said it is allowing comparisons to between cohorts of similar employers.
“That's welcome, but it’s still a large task to determine the cohort and do an assessment which is meaningful for all employers in that cohort,” said Richardson. Where the cohort approach is chosen, additional reporting is required and a justification for choosing this approach over the single employer assessments.
The watchdog is also giving IGCs some leeway with a proportionality clause in relation to comparisons with other offerings, but Richardson is concerned that this is “open to a lot of interpretation. What is proportionate?”
He welcomed other changes made in the final rules compared to the consultation, for example on the requirements where the entire membership is deferred.
When does an employer need to be notified?
Where an IGC finds that an employer is not receiving value for money, it has to raise this with the provider and, if the issue is not addressed in a satisfactory way, notify the employer.
But Richardson said it was not clear what difference in offerings would be considered significant enough to be raised. There is “no definition of what difference is material... what causes escalation or notification to the employer, that is subjective”, he said.
Notifying employers could be impractical if providers have a lot of clients, but he believes that the policy intention is for notification to act mainly as a deterrent – with the expectation that the board of the provider will give a satisfactory response if an issue is raised.
“This doesn’t mean IGCs are expecting a long list of employers to have this problem. There is strong competition. Any issues are more likely to be legacy policies,” he said, adding that it was positive that the new requirements will shine a light on legacy policies.
The elephant in the room, however, is how IGCs are to compare schemes to those of a rival without having ready access to competitors’ pricing and offer structures. The FCA originally said that “publicly available” information should be used; this has now been slightly altered so that the framework requires a comparison to the extent that data is publicly “or readily” available.
The wording suggests that the FCA is seemingly accepting that competitors’ service and price data could be available to other IGCs but not to the public. This raises some questions over competition – particularly as that is the aim of the FCA’s rules.
The new requirements also come with a need for increased resources, which a provider has to make available to its IGC. It comes on top of additional resources needed because of investment pathways and ESG, which some have warned is potentially detracting resource away from other areas.
ABI welcomes inclusion of service quality
The new rules strike a balance between costs and service. A spokesperson for the Association of British Insurers said it was positive to see that value for money goes beyond costs and charges. "We have always called for value for money to include more than just costs and charges so it is positive to see that the quality of service will be considered alongside investment performance," the spokesperson said.
The ABI said it agrees there should be alignment between trust and contract-based schemes when it comes to value for money. "It is important that the FCA and TPR are aligned on this issue to ensure that all customers receive good value. The ABI and our members fed into the consultation, and will also respond to the FCA and TPR’s joint discussion paper on value for money metrics," the spokesperson added.
Members should enjoy same protection in GPPs and trusts
The new assessment rules were welcomed by the Investing and Saving Alliance. “The flexible and holistic nature of the assessment, combined with the ongoing focus on the development of the Value for Money framework, should improve member outcomes and raise industry standards where they fail to meet the required level,” said head of retirement, Renny Biggins.
Biggins said this will create more consistency in the annual assessments across trust-based and contract-based workplace schemes, with requirements for both starting this mont.
The rules will also strengthen governance for members in contract-based schemes. “Irrespective of the type of scheme in which an employee is enrolled, members should all have the same levels of protection provided by their respective governance regime," he added.
