Value For Money: FCA Reworks Proposals

Planned regime for workplace DC is modified in the light of industry concerns

The Financial Conduct Authority and The Pensions Regulator have published a consultation paper, with revised proposals for the new value for money (VFM) framework which is to apply from 2028.

The overall shape of the framework remains as mooted in 2024, but significant changes have been made to elements within it. It seems clear that the framework will be more nuanced, and in some ways more objective, than was initially envisaged.

Background

In August 2024 the FCA launched a consultation on a new VFM framework for default arrangements under contract-based workplace schemes. There were four fundamental principles:

• transparency through the publication of key VFM metrics: investment performance, quality of services, and costs and charges;
• annual assessment and reporting on a standardised basis, to gauge comparative performance;
• public disclosure of the assessment; and
• actions required for underperforming schemes.

Further details can be found on pages 5 and 6 of our autumn 2024 Pensions Planner.

The FCA's proposals were directly relevant only to contract-based schemes. However, the Government intends the new VFM framework to apply to all workplace DC schemes. The framework will be extended to trust-based schemes via the forthcoming Pension Schemes Act and regulations to be made under it.

The new consultation paper

The FCA's original proposals met with significant pushback. The new consultation paper sets out the FCA's response, and includes draft rules and guidance for contract-based schemes.

For trust-based schemes, the new paper serves as a discussion document. Feedback submitted will inform the drafting of the relevant regulations.

Key changes

Whilst the fundamental principles mentioned above are unchanged, the FCA and TPR have reconsidered some of the underlying elements. The key changes are outlined below.

• Past investment performance: The proposed reporting requirements have been slimmed down. 15-year figures will not need to be reported. Averaging will be on an arithmetic, rather than a geometric, basis.
  
• Future investment performance: The proposal now is that VFM metrics should cover potential future investment performance, as well as past performance. Schemes will be required to report expected net returns and risk (annualised standard deviation) over the following 10 years. There will be no prescribed assumptions for forward-looking metrics; nor will schemes be required to disclose their own assumptions. There will however be a requirement for advice from an appropriate third party.
  
• Costs and charges: As with past investment performance, the proposed reporting requirements have been slimmed down. 15-year figures will not need to be reported. 3-year, 5-year and 10-year reporting will be on a simplified basis, with arithmetic, rather than geometric, averaging.
  
• Quality of services: There are minor changes to two of the metrics originally proposed (as to transactions/record-keeping and member satisfaction). Three other proposed metrics (as to member support and engagement) will be developed over the medium term, but will not apply when the framework is first launched. A new metric will however apply (as to the proportion of members who have nominated beneficiaries).
  
• Comparison with peers: For the purpose of the value assessment, a scheme will not, as originally proposed, compare itself with three other selected schemes. Instead, the comparison will be with the "commercial market comparator group" – broadly speaking, master trusts and GPPs with provider-designed defaults. A central repository will hold data for this purpose.
  
• Assessment process: The assessment process will now involve three stages rather than the original four: value delivered from investment performance; value delivered from services; and rationalisation/rating. The consultation paper acknowledges the challenges of including forward-looking investment metrics, and seeks views on potential approaches.
  
• Rating system: Instead of "RAG" as originally proposed, the rating system will be "RAGG". "Light green" is for arrangements which offer value but with room for improvement. "Dark green" is reserved for arrangements which are outperforming, where little or no improvement could be expected. Arrangements which do not offer value will be rated "red" or "amber", depending on whether value can be achieved via improvements. As originally proposed, an arrangement with either of those ratings will not be permitted to take on new employer business. Where "red" applies, there will have to be a bulk transfer of members if that is in their interests.

Next steps

The consultation closes on 8 March 2026. A further round of consultation will follow in due course. The Government/TPR will consult on the planned regulations and any Code of Practice or guidance for trust-based schemes. The FCA is likely to consult again before finalising rules and guidance for contract-based schemes.

Comment

There is much to unpick within what is acknowledged to be a "fairly technical" consultation. But two positive developments are evident.

First, the inclusion of forward-looking metrics will support the sort of productive investment which the Government wishes to encourage. The FCA and TPR are alive to the issues here: "we do not want to discourage trustees and firms from finding ways to manage the potential 'lag' in returns from assets with a projected J-curve-shaped return".

Second, the move to an RAGG system will allow for more nuanced ratings. RAG was widely felt to be too binary. Note, though, that the FCA has not changed its position as to the consequences of an amber rating; closure to new business will, for commercial providers, have serious repercussions.

The industry will welcome the slimming down of the reporting requirements, but complexity has been added in some areas, most notably with forward-looking metrics. The compliance burden will be significant, especially (in relative terms) for own-trust schemes. The consultation paper states that most own-trust schemes are likely to be subject to the new regime, regardless of size; but "this is yet to be finalised ... and we would welcome feedback ... on the appropriate scope".

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