Aegon is calling upon regulators to introduce a two-year trial period ahead of launching the Value for Money framework, warning that there is a major risk of flaws if the framework is rushed without full testing.
The proposed VFM framework, alongside other measures in the Pension Schemes Bill, will have major implications for workplace pensions and their default arrangements. The Government wants to see fewer but larger arrangements and greater investment in private assets, including in the UK.
However, Aegon said putting in place an objective framework is “fiendishly complex.”
Commenting on the joint FCA/TPR consultation, which closes on 8th March, Kate Smith, head of pensions at Aegon UK, said: “We support the aim of ensuring all workplace members are in a scheme offering value for money judged across investment performance, costs and charges, and quality of services. But coming up with an objective framework that covers all components of VFM across a diverse pension landscape is proving fiendishly complex.
“With so many changes and unknowns, there’s a real risk that pushing ahead without proper testing could produce a flawed framework with serious adverse implications for schemes, employers and members. Any default arrangement rated ‘amber’ or ‘red’ faces being closed to new employers, so flawed ratings create unacceptably high commercial risks.”
The latest proposals include a new central VFM database, with thousands of data items input by schemes, which is currently scheduled to start in March 2028. The database will then produce industry-wide average performance across the many framework measures, which Independent Governance Committees and trustees will compare before arriving at a single red, amber, light green or dark green rating for each in-scope default arrangement.
Smith said: “We strongly urge the regulators to carry out a feasibility study to test how this will work in practice. Attempting to use it ‘live’ in just two years’ time looks incredibly risky. Any inconsistencies or errors in submitted data or underlying calculations could undermine the whole framework.”
Aegon also warned that the introduction of forward-looking investment metrics carries a risk of ‘gaming the system’, boosting comparative scores by taking a more optimistic view of future performance.
“The original proposals were an attempt to move the pension industry away from comparisons based largely on costs and charges. Now they are clearly skewed towards investment performance – some of which will be highly subjective,” said Smith.
To address the complexity of the proposals, Aegon is calling for a two-year trial period.
“If done well, the framework could be a force for good. But if rushed, there are massive risks of it being flawed.
“We’re calling on the regulators to run the framework initially on a two-year trial period. This will allow time to make sure it is working as intended, producing fair comparisons, and building trust across the pension industry.
“We believe the trial should be limited to the largest multi-employer default arrangements and the largest single employer trust-based schemes, with the data shared only with the regulators. It could then be launched fully and publicly from 2030, coinciding with the deadline for main scale default funds or mega funds to reach £25bn. This would also allow providers more time to use contractual override to consolidate older style defaults into these,” Smith added.
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