The Financial Conduct Authority, the Department for Work and Pensions and the Pensions Regulator plan to bring in publicly available red, amber or green ratings for defined contribution schemes to drive better value. The FCA is now seeking responses to a new consultation, including from trust-based stakeholders. The consultation closes on 17 October.     

The ratings would be issued by independent governance committees or governance advisory arrangements in the case of contract-based schemes. To be brought in once the final framework is decided, ratings would be based on investment performance and service quality, as well as costs and charges. Poorly performing schemes would be required to improve or transfer members to better schemes. The regulators and the DWP said this should lead to better value pensions without individuals needing to take action.   

The suggested framework would: 

 

As well as a new value for money framework, the FCA is proposing greater disclosure on the asset classes and geographies schemes invest in, which follows a push from politicians to keep pension savings in the UK.
 

Pensions minister Emma Reynolds encouraged the industry to provide feedback on the proposed framework and added: “Our pension bill and pensions review will make pensions fit for the future, and having an effective value for money framework will lay the foundations for this.”  

Sarah Pritchard, executive director of markets and international at the FCA, said: “We want to see a focus on long-term value, not just costs and charges. Given the impact these changes could have we are consulting now to ensure that the pension system can be ready to go when the legislative changes that need to happen are ready.”  

There are currently 16m DC members. Everyone should get good value in DC, said Nausicaa Delfas, chief executive of TPR.   

“This is a great opportunity for the pensions industry to help to transform pension saving for millions, and to deliver greater value for their retirement,” she said.  

Nina Blackett, TPR’s executive director of strategy, policy and analysis, said the new framework would improve transparency, consistency and competition among DC schemes, adding: “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." 

The proposals, originally intended for “spring” 2024, follow a consultation response on a new value for money framework by the government, TPR and the FCA published last month, and an announcement of VfM legislation for trust-based schemes in the King’s Speech three weeks ago. The FCA is now proposing a similar framework for contract-based schemes, as the government and regulators seek to harmonise requirements.  

 

   

Responses to the FCA’s consultation will be shared with the government and TPR “to support swift development of a consistent approach” once legislation for trust-based schemes is in place, the FCA said. There will, however, be roundtables and stakeholder events, and the FCA will decide when to implement the rules following stakeholder feedback, and in discussion with the DWP, Treasury and TPR. 

Experts have said the value for money metrics intended for DC schemes could be emulating the ‘Performance Test’ introduced in Australia in 2020. The current government is consulting with the industry on improvements to the methodology, according to Neil Maines, a senior consultant at XPS Pensions Group.  

Maines said DC schemes operating a failing default option have since merged and administration fees reduced but warned against measuring performance against a composite benchmark. He said the link to member outcomes is limited and noted that it has had a herding effect in Australia. It could also disincentivise investment in private markets. 
 

   

   

 

The VfM debate goes back several years. Since October 2021, trust-based DC schemes have had to state their net investment return annually, and those with fewer than £100m in assets must carry out more detailed value for member assessments, and consolidate if they cannot provide value.