The Department for Work and Pensions (DWP), The Pensions Regulator and the Financial Conduct Authority have published their joint response to the consultation on the upcoming value for money (VFM) framework.

In the response, they revealed that the framework would be introduced in phases, although a specific timetable was not included.

The first phase will focus on workplace default arrangements, as this was where most defined contribution (DC) pension savers could be protected from remaining in underperforming schemes for long periods, the DWP and regulators stated.

They added that this will allow for sufficient time to work with the industry to address “complex” issues for pensions in decumulation, collective DC schemes, non-workplace pensions and self-select options.

Many of the VFM framework proposals, including the definition of default arrangements, will require primary legislation, and the DWP proposed to legislate “when parliamentary time allows”.

They will conduct further consultations on draft regulations and FCA rules for detailed requirements, while further details on phasing, the types of pension scheme funds in scope in each phase, and other elements of the framework will be set out in secondary legislation and future consultations.

The response also acknowledged that some consultation respondents felt too much data was being asked for, and the DWP and regulators therefore proposed to start “more simply” and consider building on the framework.

Therefore, the framework will proceed with a gross investment performance metric, rather than net of all costs and charges, which aims to reduce the amount of data points required from multi-employer schemes and simplify applying the risk metrics.

The response proposed that costs and charges data will still be disclosed separately, while member outcomes will be the focus of holistic VFM assessments.

To improve comparability, the response proposed proceeding with ‘years to retirement’ for age cohorts, rather than a defined age.

The DWP and regulators will proceed with annualised standard deviation and maximum drawdown as risk-based metrics for each reporting period and age cohort.

They intend to retain proposed reporting periods of one, three and five years, with 10 and 15 years if available.

While they recognised that data may not be currently available, they believed the main focus for comparisons should be returns over at least five years.

In future, the expectation is that schemes will report on more historic returns.

Schemes will also be expected to disclose return net of investment charges over three, five, 10 and 15 years, where the information is provided, and the framework will proceed with the requirement for ‘chain-linking’ data on past historic performance.

The consultation response also revealed that, despite complexity concerns, the DWP and regulators will proceed with a forward-looking metric and undertake further work with the Government Actuary’s Department and industry to determine whether a feasible approach to a future-looking metric is possible, and include it as soon as possible.

On the approach for the publication of framework data, the response stated a decentralised approach would be taken initially, with a prescribed template for consistent reporting.

Respondents to the consultation raised concerns that the VFM framework would overlap with the Chair’s Statement in several areas, with the DWP and regulators stating that they will consider how the requirements of the Chair’s Statement could be managed down and, ultimately, phased out as the framework is phased in.

Commenting on the consultation response, Aegon head of pensions, Kate Smith, said: “We support the concept of a VFM framework, applying across the whole DC pensions market, as it will allow greater transparency and comparability.

“We believe the right approach is to start small, focusing on the key data sets that are of the most importance to deliver value for money and improve member outcomes.

"We welcome the clear signs that the government has listened to the pension industry’s concerns and cut back on the potentially 100s or even 1,000s of data points. These risked swamping decision-makers with data, risking losing sight of key messages, with little practical value in improving member outcomes. Starting with gross rather than net of all costs and charges is helpful.

“Greater standardisation of data will help comparability, but it’s important that the framework isn’t overly prescriptive, and that trustees and governance committees are able to use their experience and expertise to supplement hard data to determine value for money. Context will be key.

“We are also supportive of a phased approach to delivery of the VFM framework over several years, although a timetable has yet to be published. We also support the initial audiences being primarily trustees, Independent Governance Committees, providers and advisers.

“Some employers may also take an interest, but we agree the framework is not currently appropriate for members. A phased approach gives time for the framework to evolve, to understand what works and is useful and what isn’t, as differ types of pensions are included.

“The VFM framework has many moving parts and clearly there’s a lot of work still to be done. Further consultations, primary legislation and importantly secondary regulation setting out the phased timetable will be needed. This is likely to take a number of years, with much implement post the next General Election – expected late 2024, early 2025.”

LCP partner, Laura Myers, added: “We welcome the fact that the government has addressed some primary concerns about key issues such as employer subsidies being included and the sheer volumes of return data.

“The VFM process must not be another cumbersome compliance document for pension schemes which could potentially mislead savers by presenting incomplete information on the costs and charges they pay for their pension provision.

“In the round, the framework presents a real opportunity for the pensions sector, not only to improve the VFM delivered to savers but also the information reported to them.

“Properly implemented, a new framework could be the basis for a more informative, member-friendly report to replace the annual DC Chair’s Statement, which has become a ‘tick box’ exercise for pension schemes and is rarely read by savers. We hope the government continues to listen to the industry as this is implemented.”

Share Story: