FCA’s Value for Money pensions framework ‘step in right direction’

9 August 2024

The Financial Conduct Authority’s Value for Money framework has been welcomed by the pensions industry as a step in the right direction, however it’s “unlikely to move the dial a tremendous amount” in the short term, says Quilter.

In its consultation published on Wednesday, the FCA, the Department for Work and Pensions and the Pensions Regulator said the joint framework for workplace defined contribution schemes would provide greater transparency over how schemes are performing.

Schemes will be compared on public metrics that demonstrate value, not just costs and charges but investment performance and service quality. They would then be rated red, amber or green.  According to the FCA, focusing on value rather than just costs will enable providers to invest in assets which could deliver greater long-term returns but have higher management costs, such as infrastructure or venture capital.

The watchdog warned that poorly performing schemes will be required to improve or transfer savers to better schemes, which should lead to better value pensions without savers having to take action themselves.

Jon Greer, head of retirement policy at Quilter, called the framework a positive step towards improving pension schemes but said it will need to be part of a broader effort to focus on outcomes, ensuring that savers receive the best possible returns.

He said: “This initiative aims to close poorly run schemes, consolidating pension saving, which could potentially improve the overall outcome for pension scheme members. However, the actual impact of these changes remains unlikely to move the dial a tremendous amount in the short term.

“Currently, the majority of pension savers are already enrolled in large, well-managed master trusts or contract-based workplace schemes that have significant oversight and stringent charge requirements. These schemes are already subject to rigorous standards and transparency through existing governance requirements. Therefore, while the new framework might lead to further consolidation of smaller schemes, it is unlikely to result in a significant step change for the industry as a whole in the short term.”

Tom Selby, director of public policy at AJ Bell, welcomed the framework as a “step in the right direction” but also noted that the regulator must keep a firm focus on what pension savers really need to make informed choices.

Selby said: “The metrics are expected to cover a wide range of areas including past investment performance, charges, communications and administration. Ultimately, this all needs to be digestible for trustees and providers if they’re to make use of the information, with the industry expected to develop ‘league tables’ curated by industry commentators which compare and contrast pensions.”

Selby said while it is easy to compare modern investment platform SIPP accounts and review the performance of funds, it is comparatively difficult to get hold of information on workplace pensions. He said many savers remain unsure what to do with their statement and how to benchmark their current provider against alternative options.

He added: “Having a common framework will push pension schemes to compare the value for money they offer on a like for like basis. 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.

“This is all part of a co-ordinated effort to drive better outcomes for pension savers, alongside the ongoing Advice Guidance Boundary Review and Pensions Dashboards, which is a project that has been around for years but has yet to deliver any tangible benefit for consumers. It is crucial to keep a firm focus on what pension savers really need to help them make informed choices. Simple, straightforward information is key, presented in a way which is easy for consumers to use when they’re choosing pension products.”

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