The pensions industry has broadly welcomed the Financial Conduct Authority’s (FCA) consultation on the value for money (VFM) framework but has warned certain aspects may have unintended consequences.

The consultation sought views on the proposed rules and guidance for the VFM framework for contract-based schemes, which are designed to be suitable for application across the defined contribution (DC) workplace pensions market.

Pensions and Lifetime Savings Association (PLSA) senior policy lead, Ruari Grant, said the association was “pleased” to have a detailed consultation on the VFM framework, describing it as a “key pillar” of the government’s plans to best utilise pension savings to support the UK economy and scheme members.

“We support the plans to increase focus on net risk-adjusted returns delivered to savers, as opposed to just the cost of provision, and the proposed performance disclosures and comparisons should go some way to achieve this,” Grant continued.

“As we have stressed in previous discussions with both regulators on this topic though, we encourage more consideration of how to meaningfully and fairly compare the less tangible services offered by schemes.

“More broadly, we welcome FCA’s acknowledgement that the framework will need to be workable when applied to the trust-based sector, and that they will continue to work closely with The Pensions Regulator (TPR) to this end, so that true and holistic comparisons are achieved across all DC pensions."

The PLSA also urged decisionmakers to bring non-workplace schemes and decumulation offerings within scope, a sentiment that was echoed by People’s Partnership chief executive officer, Patrick Heath-Lay.

Heath-Lay said: "We believe this framework should be expanded to include non-workplace pensions as soon as possible and be a feature of commercial dashboards at launch, so that savers can easily compare pensions across the whole market."

While many welcomed the FCA’s consultation, LCP partner and head of DC, Laura Myers, warned that there were a number of risks to consider with this new approach.

“One is that high-quality schemes run by individual employers, often with the benefit of an employer subsidy, may not score highly in the eyes of the government compared with giant master trusts, even if member outcomes could be as good if not better,” she stated.

“It is important that the government does not focus on size for size’s sake.

“There is also a risk that schemes will be so afraid of even an ‘amber’ rating that they will be more risk-averse and afraid of being outliers. This could lead to ‘herding’ of investment strategies rather than rewarding schemes which are willing to innovate and invest for the long term. In short, there is a risk of the law of unintended consequences coming into play with this consultation.”

Furthermore, NatWest Cushon director of policy & research, Steve Watson, said that while the proposed ‘traffic light’ system on VFM could provide a source of clarity, it ran the risk of oversimplifying a complex topic.

“Given the new government’s focus on productive finance, which has the potential to boost growth and deliver higher returns, it is also important this framework isn’t too heavily focused on costs and past performance,” Watson added.

“If these two metrics carry too much weight, they could inadvertently drive ‘middle of the road’ investment strategies that exclude more expensive assets like unlisted equities.

“On that note, to exclude forward-looking performance metrics as part of the framework is a missed opportunity. To not include them may push schemes away from those productive UK assets the government wants pensions to pursue and again drive pensions towards a middle ground.

“We recognise the risk with forward-looking metrics, but as the DWP’s paper on this topic pointed out recently, there are ways around those potential issues.”

Despite these concerns, AJ Bell director of public policy, Tom Selby, noted that the increased transparency created by the VFM framework was a step in the right direction.

“Having a common framework will push pension schemes to compare the VFM they offer on a like for like basis,” he said.

“This will hopefully encourage, or even shame schemes, into improving their offering to customers – whether that means better investment performance, lower charges, slicker service or a combination of all of those things.”

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