TISA calls for two-year test period for VfM framework
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The Investing and Saving Alliance is calling for a test period for new value for money rules for defined contribution schemes, to avoid unintended consequences and align with incoming scale requirements, while PensionBee warns future performance metrics could be “outright misleading” as a consultation on the new value for money framework is about to close.
The Financial Conduct Authority’s further consultation on value for money in DC closes on Sunday, with the Pensions Regulator urging schemes to respond, as requirements will be mirrored in the the trust-based community through the pension schemes bill.
In January, the FCA changed its 2024 proposals on how schemes should signal their value to savers from a simple traffic light system to one with four colours - including dark green and light green. In addition, it suggested schemes should feed their data into a central system and compare themselves against the other schemes in this database, rather than with just three handpicked competitors as previously proposed.
Controversially, it also added a proposal that schemes could provide 10-year forward-looking metrics – their assumptions about their future investment performance – to be considered alongside 10-year backward-looking metrics, saying more respondents to its earlier consultation had been in favour than against.
For TISA, the scale of changes means “there is potential for unintended reputational, commercial and member consequences”.
The FCA is working towards 2028 for the first VfM assessments to be required; TISA wants this to be the start of a test period until 2030, saying that this would allow the framework to be implemented as intended.
“Crucially, a live date of 2030 aligns with the scale requirements deadline, the point where there will be a significant reduction of default arrangements which would fall within the scope of VfM, simplifying the transition for everyone,” it said.
TISA also wants engagement metrics to be a mandatory part of how quality of services is measured – an area that has proved more difficult to quantify, and urges the FCA to require assumptions about future performance to be kept separate from past performance data.
Renny Biggins, head of policy for products and long-term savings at TISA, said: “The VfM framework has the potential to be transformative for pension savers. With the pensions industry and millions of members counting on the FCA to get this right, refining the metrics which underlie the initiative could be the difference between delivering better outcomes or ultimately harming the very members the framework is designed to support.”
Provider PensionBee cautioned that incorporating forward-looking metrics into performance scoring could lead to financial harm to savers, urging the FCA to drop this proposal.
Return projections, particularly those linked to illiquid private market assets, “are effectively ‘educated guesswork’: inherently uncertain, difficult to standardise and heavily dependent on modelling choices”, it said.
Given schemes might be using different valuation methodologies, smoothing techniques and assumptions about future risk mean these predicted returns may not be meaningfully comparable, it argued, “and, at worst, could be outright misleading”.
It agreed with TISA that such assumptions must be separate from past performance data, saying blending the two could produce numbers that “give an illusion of precision, but mask different underlying assumptions”.
“Over time, this could distort the central database against which VfM is judged and influence DWP comparative benchmarks used to generate commercially consequential ratings for pension schemes,” it warned.
PensionBee called for independent validation of modelling assumptions, “clear and repeated” risk warnings where private markets exposure increases and “a full industry dry run before any public disclosure of ratings to avoid unintended market disruption”.
Chief business officer Lisa Picardo said: “Forward-looking metrics amount to crystal-ball gazing. Even in transparent public markets, regulators rightly stress that past performance is no guide to future returns. In private markets – where valuations are infrequent, methodologies vary and outcomes hinge on timing and exit conditions – the scope for over-optimism is far greater.”
She warned that “to pension savers, projected returns could carry enormous but unwarranted weight in decision-making and risk creating a false sense of certainty about inherently uncertain outcomes”.
The FCA is aware of the gaming risks in providers producing their own forward-looking metrics, but believes that schemes would have a long-term interest in making sure that their projections are reasonable, saying overly optimistic projected returns “would be identified when compared to the comparator group average” and, over time, against past performance.
The Financial Conduct Authority’s further consultation on value for money in DC closes on Sunday, with the Pensions Regulator urging schemes to respond, as requirements will be mirrored in the the trust-based community through the pension schemes bill.
In January, the FCA changed its 2024 proposals on how schemes should signal their value to savers from a simple traffic light system to one with four colours - including dark green and light green. In addition, it suggested schemes should feed their data into a central system and compare themselves against the other schemes in this database, rather than with just three handpicked competitors as previously proposed.
Controversially, it also added a proposal that schemes could provide 10-year forward-looking metrics – their assumptions about their future investment performance – to be considered alongside 10-year backward-looking metrics, saying more respondents to its earlier consultation had been in favour than against.
For TISA, the scale of changes means “there is potential for unintended reputational, commercial and member consequences”.
The FCA is working towards 2028 for the first VfM assessments to be required; TISA wants this to be the start of a test period until 2030, saying that this would allow the framework to be implemented as intended.
“Crucially, a live date of 2030 aligns with the scale requirements deadline, the point where there will be a significant reduction of default arrangements which would fall within the scope of VfM, simplifying the transition for everyone,” it said.
TISA also wants engagement metrics to be a mandatory part of how quality of services is measured – an area that has proved more difficult to quantify, and urges the FCA to require assumptions about future performance to be kept separate from past performance data.
Renny Biggins, head of policy for products and long-term savings at TISA, said: “The VfM framework has the potential to be transformative for pension savers. With the pensions industry and millions of members counting on the FCA to get this right, refining the metrics which underlie the initiative could be the difference between delivering better outcomes or ultimately harming the very members the framework is designed to support.”
Provider PensionBee cautioned that incorporating forward-looking metrics into performance scoring could lead to financial harm to savers, urging the FCA to drop this proposal.
Return projections, particularly those linked to illiquid private market assets, “are effectively ‘educated guesswork’: inherently uncertain, difficult to standardise and heavily dependent on modelling choices”, it said.
Given schemes might be using different valuation methodologies, smoothing techniques and assumptions about future risk mean these predicted returns may not be meaningfully comparable, it argued, “and, at worst, could be outright misleading”.
It agreed with TISA that such assumptions must be separate from past performance data, saying blending the two could produce numbers that “give an illusion of precision, but mask different underlying assumptions”.
“Over time, this could distort the central database against which VfM is judged and influence DWP comparative benchmarks used to generate commercially consequential ratings for pension schemes,” it warned.
PensionBee called for independent validation of modelling assumptions, “clear and repeated” risk warnings where private markets exposure increases and “a full industry dry run before any public disclosure of ratings to avoid unintended market disruption”.
Chief business officer Lisa Picardo said: “Forward-looking metrics amount to crystal-ball gazing. Even in transparent public markets, regulators rightly stress that past performance is no guide to future returns. In private markets – where valuations are infrequent, methodologies vary and outcomes hinge on timing and exit conditions – the scope for over-optimism is far greater.”
She warned that “to pension savers, projected returns could carry enormous but unwarranted weight in decision-making and risk creating a false sense of certainty about inherently uncertain outcomes”.
The FCA is aware of the gaming risks in providers producing their own forward-looking metrics, but believes that schemes would have a long-term interest in making sure that their projections are reasonable, saying overly optimistic projected returns “would be identified when compared to the comparator group average” and, over time, against past performance.
Despite acknowledging the concerns of many, the FCA proposed not to require firms and trustees to disclose the assumptions behind their projections.
Anne Sander, who heads up trustee firm Zedra’s governance advisory arrangement, sees the proposed framework as a positive evolution in how value for money is assessed in workplace pensions but agreed some parts of it risk distortion.
Forward-looking metrics should be halved, she suggests. “We believe the framework should require five-year forward-looking investment performance metrics, alongside one-year measures for cohorts within five years of retirement and at retirement. This would provide a more meaningful assessment of the value members can reasonably expect to receive,” Sander said.
She added that GAAs and independent governance committees should have transparency over the capital market assumptions underpinning forward-looking metrics so they can challenge them if needed and better assess past performance. It would also provide an additional safeguard against potential gaming, she said.
Anne Sander, who heads up trustee firm Zedra’s governance advisory arrangement, sees the proposed framework as a positive evolution in how value for money is assessed in workplace pensions but agreed some parts of it risk distortion.
Forward-looking metrics should be halved, she suggests. “We believe the framework should require five-year forward-looking investment performance metrics, alongside one-year measures for cohorts within five years of retirement and at retirement. This would provide a more meaningful assessment of the value members can reasonably expect to receive,” Sander said.
She added that GAAs and independent governance committees should have transparency over the capital market assumptions underpinning forward-looking metrics so they can challenge them if needed and better assess past performance. It would also provide an additional safeguard against potential gaming, she said.
