The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) have launched a joint discussion paper on developing the framework for measuring value for money (VFM) in defined contribution (DC) pension schemes.

The regulators have proposed a common framework for disclosing information on what they describe as the “key elements” that make up VFM: investment performance; scheme oversight, including data quality and communications; and costs and charges.

These disclosures need to be made on a consistent basis to allow for effective comparison, the regulators noted, and getting the standards disclosures right is “essential and requires complex considerations”.

In designing market-wide disclosures, TPR and the FCA have proposed building on the existing definitions that underpin the disclosures already required by certain DC workplace schemes, namely administration charges and transaction costs.

A second option proposed was to split the current definition of administration charges in two - fund management and pensions administration.

Due to the range of schemes in the market, the regulators believe that it would not be possible for employers and trustees to compare their schemes’ VFM with all available schemes.

Therefore, TPR and FCA proposed the introduction of industry benchmarks for costs and charges, and the use of specific benchmarks for comparing investment performance could be prescribed.

One benchmark option for costs and charges would be the market median charge, or the median for a relevant market segment. This potentially enables the use of the same benchmark metric across all pension schemes, with the option of applying different benchmarks for different categories of scheme.

However, the regulators noted that a disadvantage of this benchmark is that the median is relative rather than absolute measure.

Another option proposed was the mean average of charges in the market, although the regulators warned that this was liable to being skewed by extreme outliers in the market.

“Another option would be to introduce more segmentation within the benchmarks by using quartiles, rather than just the median,” the regulators said.

“This would help to give a clearer picture of the spread of charges in the market and encourage providers in the lowest performing quartile (ie those with the highest charges) to improve their VFM. These benchmarks are all relative and so have the same disadvantage highlighted above for the median.”

For comparing investment performance, the regulators asked if it would be helpful and possible to establish a benchmark, or if comparing cohorts against a market average or a few selected similar schemes would be preferable.

They also queried whether the industry believed a commercial benchmark was likely to emerge if the data was made publicly available.

The FCA and TPR noted that disclosures alone would not address the “difficult issues” surrounding VFM in pensions, with improving data disclosures a “starting point” and the regulators will continue to work with stakeholders to improve saver outcomes.

Commenting on the discussion paper, TPR executive director for regulatory policy, analysis and advice, David Fairs, said: “Delivering value for money in pensions is a key priority for TPR – all part of our work to put savers at the heart of what we do.

“Regulators, industry and others must be able to effectively assess value for money to ensure good pensions outcomes. The discussion paper sets out our ambitions for an industry-wide VFM assessment framework.

“DC savers rely on the pension system working as best as it can over the lifetime of their saving - every penny counts. That's why independent governance committees and trustees need a framework which provides a holistic assessment of what VFM means - beyond cost and charges - to allow them hold their providers to account and deliver the best possible outcomes for savers.”

The consultation runs until 10 December 2021 and the regulators will publish a feedback statement setting out their next steps in 2022.

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