The Financial Conduct Authority has opened a consultation on a new value for money framework, for savers invested in default arrangements of workplace defined contribution pension schemes.
But for the DC workplace pensions industry, the regulator’s focus on value for money is not new. In 2020, the FCA published a consultation paper that proposed a more detailed framework for independent governance committees to consider value for money.
In its latest consultation, the FCA, The Pensions Regulator and the Department for Work and Pensions have stuck with a previous proposal that arrangements be rated red, amber or green as an assessment of value under the VFM framework.
Rona Train, head of DC trustee consulting at Hymans Robertson, says it will generally be arrangements that have not been fully reviewed since they were set up that would be rated as amber or red.
“Many contract-based arrangements were set up by companies in the 1990s and early 2000s, when defined benefit schemes were closed to new members. A lot of companies won’t have checked if the details of their arrangements suit their current needs.
“This lack of ongoing governance from companies has often meant that arrangements now have higher fees than would have been the case had they been reviewed more regularly.
“In some cases, outdated investment strategies are still in place and no focus has been placed at the company level on whether the strategy remains suitable for their membership, which may have changed dramatically over the past 20 years.”
While arrangements must meet their charge cap, Train adds that, unless challenged by companies with the help of advisers, providers have had little incentive to offer lower fees or better services to companies. “More widely, members of these types of arrangements often don’t benefit from the latest engagement techniques, such as apps,” she says.
Tim Box, a principal in the pensions research team at LCP, likewise says that where the consultancy has seen arrangements that would be rated as amber or red under the proposed framework, these arrangements have very often been in place for a long time.
“They tend to be in very small schemes that either cannot negotiate better terms for their savers, or else are lacking in governance,” says Box. “But we emphasise that in our experience these are very small schemes, say under £50mn, and that many single employer schemes do provide value for money for their savers.”
The VFM framework: a refinement or overhaul?
The consumer duty already requires firms to consider the value of the pension products they offer, and for workplace pension products, firms must use their IGC’s conclusions in their assessment.
The main difference in principle between what IGCs are already doing and what the framework is proposing, Box says, is that the consequences for a provider of receiving a red or even amber rating for their arrangements will be severe.
“If IGCs are prepared to issue amber or red ratings, then this should give them considerable power to pressure providers to improve their offerings to green, which should ultimately lead to better saver outcomes.”
