Inclusion of future investment performance in VfM ratings divides DC industry
Image: Tumisu/Pixabay
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
The Pensions Regulator and the Financial Conduct Authority are consulting again on a value for money framework for defined contribution schemes. Industry representatives are split over the addition of forward-looking performance metrics and have said a proposed central database should be used with caution. Feedback can be sent to the FCA until 8 March.
Thursday's response to the FCA’s 2024 consultation on measuring value for money and making ratings public is accompanied by a further consultation and a discussion paper. The City regulator is inviting feedback on its proposals jointly with TPR, as the pension schemes bill will introduce VfM requirements for trust-based DC schemes.
“Good value isn’t just about low costs – it’s about strong performance, good service, and transparency. We want to see a focus on value. By working with government and the Pensions Regulator, we’re helping secure better returns for pension savers,” said the FCA’s deputy chief executive Sarah Pritchard.
TPR’s chief executive Nausicaa Delfas added: “Millions of people rely on pension income to support them through later life. We have to make sure they get value for their money. This framework will empower decision-makers to either improve their scheme or consolidate out of the market. We want to hear the views of trustees to make sure we get this right and help transform pension saving for millions.”
In the trust-based sphere, regulation will be based on pensions legislation that is yet to be passed.
Pensions minister Torsten Bell said it is currently too difficult for people to know whether their pension savings are working for them: “That's not right when we're talking about something as important as people's security in retirement. These proposals change that. Pension schemes performance will be public with a simple rating system. In future, savers will know if they are getting a good return or not.”
Under the latest proposals, assessment outcomes will be shown in an adapted traffic light rating, with dark green for strong performance, light green for good value, amber for improvement, and red for poor value.
Aside from this the main changes proposed since the FCA’s 2024 consultation are that the regulator is now proposing to introduce 10-year forward-looking metrics to be considered alongside 10-year backward-looking metrics, and reducing requirements to use a “maximalist” set of data to assess costs and backward-looking investment performance.
The FCA appears unsure about measuring service quality through administrative and engagement metrics, including a standardised member survey, as previously suggested, and has not included them in the latest consultation, saying that further engagement with industry is required to ensure engagement metrics work as intended.
Compared with the previous consultation, schemes would now need to compare their value not just with three other schemes of their choosing but with “a much wider commercial comparator group”. Doing this would become possible through a new central VfM database into which all scheme data would be entered for data quality, comparison and publication.
'Risk of subjectivity and lack of comparability'
The Association of British Insurers welcomed the addition of a fourth rating category and forward-looking metrics.
Senior policy adviser Ben Infield said: “We’re pleased to see the regulators and government have listened to industry and included provisions for a more nuanced approach on scoring assessments as well as a reduced set of data requirements.”
The inclusion of forward-looking metrics was “vital, to ensure schemes aren’t penalised for investing in global and UK private markets where long-term investment can deliver greater value over time”, he added.
Providers Standard Life and Aviva have also been positive about making future performance assumptions count towards the final rating, but others warn that without strong guardrails, this could open the door to over-optimistic projections.
Some in the industry were concerned that investment in private markets – which many large DC providers have committed to under the Mansion House Accord – might artificially depress fund performance in the short term and lead to a lower VfM rating, noted Patrick Heath-Lay, chief executive of DC master trust provider People’s Partnership, which the FCA has sought to address by adding forward-looking metrics.
However, “the guardrails around forward-looking metrics will need to be strong to avoid providers using projections of strong future performance to camouflage poorer past performance and may, in fact, only be necessary whilst the industry is in transition”, he cautioned.
In the same vein, Aegon’s pensions director Steven Cameron warned that adding forward-looking investment performance data, with trustees and schemes given flexibility around assumptions and approach, “creates a real risk of subjectivity and lack of comparability”.
The FCA has been looking to address similar concerns of subjectivity around comparator arrangements, by requiring DC schemes to compare themselves to more than just three competitors.
A centralised database compiling commercial market averages for rating purposes replaces the risk of governing bodies selecting their own three comparator arrangements, Cameron acknowledged, but he argued that “the stakes for making sure the averages are fair and meaningful are high”.
These concerns about a central database were echoed by Alison Leslie, who heads up DC investment at consultancy Hymans Robertson.
“A central repository, whilst on the face it makes sense, needs to be used with caution particularly given the use of differing assumptions by schemes as this could lead to misleading and inconsistent comparison approaches,” Leslie said.
Guided retirement solutions should be compared in future - TPT
Smaller providers have welcomed the focus on VfM along with size, as DC default funds will be subject to minimum size requirements under the pension schemes bill. Smith argued that size alone doesn’t guarantee better member outcomes, making value for money a key tool to hold schemes to account.
“Crucially, the VfM framework will lead to increased scrutiny of the investment performance of DC schemes, and help employers and advisers move away from cost-dominated provider selection. Over time we would also hope that the framework is extended to objectively assess the quality of guided retirement solutions, which will become increasingly important to outcomes as the DC generation matures,” he said.
The FCA plans to offer roundtables and stakeholder events to discuss practical aspects of the proposed framework. Government and regulators intend that the rules for contract and trust-based arrangements will come into force at the same time, and are "working towards" 2028 for the first VfM assessments to be required.
