The Financial Conduct Authority (FCA) has launched a consultation seeking views on the proposed rules and guidance for the value for money (VFM) framework for contract-based pension schemes.

It outlined its proposals for the VFM framework for savers invested in default arrangements of workplace defined contribution (DC) schemes, including a traffic light system in the public disclosures of VFM assessments.

A 'red' assessment would signify poor value and a scheme in danger of wind-up, 'amber' will mean there's room for improvement, and green will signify the scheme provides VFM.

The FCA noted that while this consultation related to rules for FCA-regulated firms operating contract-based pensions, its proposals are based on previous joint work with the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR), and are designed to be suitable for application across the DC workplace pensions market.

TPR, the DWP and the FCA are aiming to implement a joint framework for workplace DC schemes to be used by pension providers and those making decisions on behalf of savers.

The VFM framework is designed to fit within existing Consumer Duty processes already put in place, with firms having an obligation to consider the value of the pension products they offer and, for workplace pension products, to use their Independent Governance Committee’s (IGC) conclusions in their assessments.

The FCA has proposed retaining this model and to strengthen it by creating common metrics, aiming to being transparency to the market and harmonise how IGCs approach their work on value.

Under the framework, four elements will be introduced, including the requirement for consistent measurement and public disclosure of investment performance, costs, and service quality by firms for all such arrangements against metrics the FCA believes will allow VFM to be assessed effectively.

It will also seek to enable those overseeing and challenging an arrangement’s value to assess performance against other arrangements and require them to do so on a “consistent and objective basis”.

Assessment outcomes will need to be publicly disclosed with the inclusion of a red/amber/green VFM rating for each arrangement, and firms will be required to take specific actions where an arrangement has been assessed as ‘red’ or ‘amber’.

Following on from its joint consultation with the DWP and TPR, the FCA has set out the detail underpinning the joint approach.

It is seeking views on the proposed scope of the requirements, how the core metrics on cost, performance and quality of service are to be calculated and published, and the processes to be adopted by IGCs in assessing arrangements.

The FCA also consulted on the range of actions to be taken by firms in the event an arrangement is poor value for money, and on the annual publication cycle and the details of how metrics are to be published.

It has launched its consultation for contract-based schemes ahead of the DWP introducing equivalent legislation for trust-based schemes in an upcoming Pension Schemes Bill.

“Last year, over £130bn was saved into workplace pension schemes – money which we want to see working hard for future pensioners to give them better retirement incomes,” commented Pensions Minister, Emma Reynolds.

“Our Pension Bill and Pensions Review will make pensions fit for the future, and having an effective VFM framework will lay the foundations for this.

"I would encourage responses from across the industry, including trust-based schemes, to this consultation.”

FCA executive director of markets and international, Sarah Pritchard, added: “16 million people save for their retirement into DC pension schemes. We’re working with the government and TPR to help them get better returns.

“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.”

Also commenting on the consultation launch, TPR chief executive, Nausicaa Delfas, said: “We want every pension saver to get value for money from their pensions. That means good investment returns, and high-quality services, for a competitive price.

“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.”

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