Defined contribution pension schemes will be barred from taking on new business if they perform poorly, under a value for money drive announced by the Treasury on Saturday. The Financial Conduct Authority is due to consult on the plans in the spring.         

The value for money reforms partly aim to accelerate DC consolidation, based on the government’s desire to drive investment in illiquid assets and the Pensions Regulator’s view that larger schemes tend to be better governed. The new value for money framework will also harmonise requirements across the trust and contract-based DC world. A consultation by the government, TPR and the FCA ran in March last year, and another for 2024 was announced last November. 

 

 

Progress has been relatively slow as the pensions industry did not agree on several points, including schemes being benchmarked.
   

 

Under the changes announced by the Treasury over the weekend, DC pension schemes will be required to report their net performance and costs by 2027. They will need to compare their data against competitor schemes, including at least two managing £10bn or more. The Treasury said this type of disclosure will help employers and savers make informed choices. 

Those performing poorly “won’t be allowed to take on new business from employers”, it added, pointing to “a full range of intervention powers” by the Pensions Regulator and the FCA. 

The chief executive of the Pensions Regulator, Nausicaa Delfas, stressed the importance of making sure all pension savers receive value for money. 

She said: “With more disclosure helping to spark competition between schemes, and enhanced powers to crack down on poor performers, we can really deliver for savers, now and in the future.” 

Trust-based schemes already have to complete an annual value for members assessment and report their net investment returns, but TPR has found fewer than a quarter are meeting value for money requirements, and nearly two-thirds (64%) of small schemes that newly came into scope in 2021 claimed they were unaware of this statutory obligation.
   

     

   

DC schemes will also have to publicly disclose their allocations to the UK as the government hopes they will invest more in ‘productive finance’ assets in the UK, to help improve the country’s flatlining economic performance.  

“British pension funds appear to contribute less to the UK economy than international counterparts do as they invest less in our domestic businesses. These requirements will help focus minds on how to improve overall returns and outcomes for savers,” said chancellor Jeremy Hunt.    

Work and pensions secretary Mel Stride said the new value for money framework will focus pension funds on “their number one priority – securing the best possible returns for savers – as well as providing a boost to the wider economy”.  

The pensions industry welcomed the fact the value for money framework is taking shape. However, it wants to have clarity on the definitions of ‘poor performance’ and of ‘UK investment’.  

“It’s important all members are saving in schemes offering good value for money so it makes sense that consistently poorly performing schemes should not take on new business until they improve, or subsequently wind up,” said Kate Smith, head of pensions at provider Aegon.   

“However, much care is needed in defining a poorly performing scheme. Different schemes can adopt different investment strategies which can lead to divergence in returns in the short term, making it important to assess investment performance over a sufficiently long timeframe,” she added.  

Smith also pointed out that there are currently only a handful of £10bn-plus DC schemes to compare against. She warned that few commercial schemes will be prepared to allow poor value schemes to consolidate with them, as it costs less as a percentage of funds to run a scheme for a large employer with a stable workforce and high average contributions than one for a small employer with low contributions and high staff turnover.   

“We understand the government’s and regulator’s desire to speed up scheme consolidation, but this needs to be reflected in the framework to make sure all cohorts of employer can assess the value they are receiving compared to others like them,” she said.  

On mandating the disclosure of the proportion of pension assets invested in the UK, she said this was “likely to bring more focus, transparency and comparability to geographical asset allocation. But to be effective, there needs to be an unambiguous definition of what constitutes investment in the UK.”  

There could be unintended consequences from the performance requirement for schemes, such as discouraging a long-term focus if it only looks at portfolio returns, suggested Mike Clark, founder of Ario Advisory.

Schemes that have reduced their strategic allocation to the oil and gas sector, for instance, would not have performed very well recently at the total scheme level compared with others, he noted, but their long-term outcomes might look very different. 

"They know exactly what they are doing to serve their beneficiaries,” he said.

Retirement savings director at provider Standard Life, Mike Ambery, welcomed the government's focus on performance and transparency around investments but added his firm would encourage any new framework to include other aspects of performance, such as the quality of digital services and service indicators like net promoter scores. 

He also pointed out that the factor impacting people’s retirement outcomes the most is levels of contributions. "We would like to see a regular government review of the contribution rates by employers and employees, considering the outcomes people are on track for," he said.

What are your views on the VfM framework?