Value for Money: The next stage of the DC pensions journey

Pardon the Interruption

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Last year, the government published its proposed value for money (VFM) framework. This collaboration between the Financial Conduct Authority (FCA), the Department for Workforce and Pensions (DWP) and the Pensions Regulator (TPR) delivers a roadmap to achieve better outcomes across the defined contribution (DC) space. What are the specific goals of this framework and what steps will trustees need to take to implement it?

UNLOCKING LONG-TERM VALUE FOR DC SCHEMES AND SAVERS


The VFM framework, which builds on and will eventually replace the Value for Members assessment, is a key part of the government’s plan to ensure DC contributions are invested in a way that best serves members’ interests while protecting them from disproportionate costs. To achieve this, it sets out a template for assessing and disclosing VFM across three specific elements: 


Schemes will need to report data on each element, compare this against benchmarks/other schemes and conduct a VFM assessment. 

The framework will require primary legislation before it can live. Once enacted, will apply to default arrangements, legacy schemes and arrangements where at least 80% of savers are enrolled. 

DELIVERING MORE TRANSPARENCY AND COMPARABILITY 


One of the framework’s main goals is to improve market-wide access to standardised, comparable and transparent data. Additionally, the government aims to deliver lasting outcomes, drive continuous improvement and reduce the burden of added costs/admin work.

Importantly, these proposals were drafted in a way that mitigates the risk of disproportionately harming people with protected characteristics. This is crucial because addressing DC inequality is a critical part of the government’s pensions reform agenda. 

Moreover, the VFM framework includes a comprehensive three-step process which covers assessment and disclosure in the following areas:


FORWARD-LOOKING METRICS FORM AN INTEGRAL PART 


Step one of the VFM assessment entails evaluating and disclosing overall performance using five key metrics:


The inclusion of forward-looking metrics is notable because our Trustee Report 2022, which was produced in partnership with Janus Henderson Investors, uncovered that few DC schemes use forward-looking inputs even though other metrics like costs & charges and returns-based ones are broadly used in their assessments.

A MORE SYSTEMATIC LENS TO COMPARE INVESTMENT STRATEGIES


Step two in the framework focuses on the investment strategy and calls for its assessment against other schemes/industry benchmarks. Schemes must also disclose returns net of investment charges to demonstrate the value delivered by the strategy. 

Finally, schemes will need to disclose the proportion of assets allocated (in their default or other main arrangements) across eight asset classes: 


Asset allocation disclosure will be included in the Chair’s annual statement and will allow for greater comparability of schemes’ default arrangements against one another.

A MORE ROBUST UNDERSTANDING OF THE QUALITY OF SERVICES


The third step assesses the services rendered both in terms of their costs as well as the impact on members, via the following:


Importantly, although many DC schemes use an annual percentage charge on funds under management to report on their costs and charges, others may favour a combination charging structure. In such instances, these schemes will need to use one of the following two ways to disclose on their default arrangements: 


To allow for greater comparability, the government is also considering mandating these schemes as well as legacy schemes with complex charging structures to disclose their charges as a single annual percentage.

IMPROVING TRANSACTION DISCLOSURES AND THE EFFICACY OF MEMBER COMMS 


In addition to reviewing the quality and costs of services, trustees and pension providers will also need to disclose and assess the promptness and accuracy of the following core financial transactions that have been completed:


Finally, the framework calls for schemes to apply the following metrics to evaluate the effectiveness of their member communications: 


This is critical because, as noted in our Trustee Report 2022, increasing member engagement and improving member communications are among the biggest challenges confronting DC schemes.

VFM WILL SET THE STAGE FOR THE FUTURE OF DC PENSIONS


After conducting the assessment, schemes will need to state which of the following three categories category they fall under:


Naturally, schemes will encounter challenges during the rollout of the framework. However, doing this is important as it will push DC pensions providers to be more transparent about their costs and services and ultimately deliver better long-term value for DC savers. Additionally, TPR’s inclusion of VFM as part of its three-year corporate roadmap highlights that the government is firmly committed to making this work for the industry and savers.

Given the government’s ongoing efforts to reform the DC landscape, mallowstreet is planning to conduct in-depth research projects to identify and address the key challenges and opportunities for trustees and asset managers in this space. Please contact our team if you are interested in becoming a research partner. 

What do you think about the VFM framework? Tell us in the comments below.

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