The VFM framework is expected to significantly alter the landscape for workplace defined contribution (DC) pension schemes. With over 16 million people in the UK saving into DC pensions, the proposal aims to create consistency across the trust and contract based pension space and ensure that these schemes deliver genuine value beyond merely low costs.
The proposed VFM framework, outlined in Consultation Paper CP24/16, is introduced against the backdrop of an increased focus on DC schemes diversifying into less liquid assets and a broad recognition that focusing on low management charges doesn't drive returns, therefore isn't necessarily in members' best interest. The framework mandates a comprehensive assessment across three key areas: investment performance, costs and charges, and service quality. These metrics will be standardised and publicly disclosed, enabling savers, employers, and independent oversight bodies to compare pension schemes more effectively. This marks a shift towards greater transparency and accountability, aiming to tackle issues of underperformance that have long plagued parts of the market.
At the heart of this initiative is the role of Independent Governance Committees (IGCs), which will be responsible for assessing the value provided by pension schemes. Such committees are already required for master trusts, the proposals are designed to harmonise the governance gap between trust, and contract based schemes. IGCs will employ a Red-Amber-Green (RAG) rating system to evaluate schemes—where a Red rating signals poor value, Amber indicates areas needing improvement, and Green denotes good value for money. This simplified rating system is designed to provide a clear, understandable measure of performance for consumers and stakeholders alike.
One of the most significant aspects of the new framework is the requirement for firms to take corrective action if their schemes are deemed not to deliver value. Poorly rated schemes will need to make tangible improvements, whether by reducing costs, enhancing investment strategies, or improving the quality of service provided to members. This emphasis on accountability ensures that pension providers can no longer overlook underperformance without consequences.
The consultation runs until 17 October 2024, with a final policy statement expected thereafter. The framework is initially targeted at FCA-regulated firms but trust based stakeholders have been invited to respond as it is anticipated to extend to trust-based pension schemes through future legislation. This move towards regulatory alignment underscores the broader government initiative to standardise pension governance across the entire market.
For pension providers and trustees the message is clear: now is the time to start aligning with the proposed VFM framework. Firms should begin preparing for the new public disclosure requirements and ensure that their IGCs are ready to undertake rigorous value assessments. The annual publication of these assessments will create a cycle of continuous scrutiny, pushing firms to maintain high standards year after year.
While the consultation period offers an opportunity for stakeholders to provide feedback, the direction of travel is evident. There is a clear multi-agency commitment to implementing a framework that prioritises savers’ interests and elevates the standards across the pension industry.
In conclusion, the FCA’s VFM framework represents a decisive step towards improving the quality and transparency of workplace pension schemes. Firms must engage with the consultation process and start preparing for the upcoming changes to ensure they can deliver the long-term value that savers deserve. With retirement outcomes hanging in the balance, this initiative could be a game-changer for millions of pension savers across the UK.
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