Value for money in DC pension schemes – new framework

The government, the Financial Conduct Authority and The Pensions Regulator (TPR) have confirmed that a new value for money (VFM) framework for DC occupational pension schemes¹ and workspace personal pension schemes will be introduced.

The framework is intended to improve retirement outcomes by providing a standardised understanding of VFM, allowing increased transparency, comparability and competition, and shifting the emphasis from costs alone towards longer-term performance outcomes. The intention is that the new framework will ultimately replace both the current value for members requirements that apply to all DC schemes and the more detailed value for members requirements that were introduced in October 2021 for DC occupational pension schemes with less than £100 million in assets.

Under the new framework, DC occupational pension schemes and workplace personal pension schemes will be required to disclose, assess and compare the VFM that they provide across three areas:

• Investment performance.
• Costs and charges.
• Quality of services – specifically member communications, promptness and accuracy of core financial transactions and quality of record-keeping.

Schemes will be required to report publicly on a range of metrics in relation to these three areas using a standardised template and to use this data to assess the VFM that they offer when compared to the market. Annex 2 to the consultation response provides an illustrative list of the data that schemes will be required to disclose and compare. Initially, schemes will be required to compare their data against a sample of other schemes in the market using a mandatory step-by-step approach. However, the government is aiming to eventually develop regulator-defined benchmarks for schemes to compare themselves against.

Following the assessment, schemes will be required to conclude whether they:

• Provide VFM (a “green” rating).
• Do not currently provide VFM, but have identified improvements that will deliver VFM (an “amber” rating).
• Do not provide VFM (a “red” rating).

TPR will be given powers to enforce wind-up and consolidation of schemes with a red rating or that have had an amber rating for two consecutive years if it considers this to be in members’ interests.

Schemes will be required to publish their VFM data (calculated as at 31 December of the previous year) by the end of Q1 each year and to publish their VFM assessment in October each year, in both cases regardless of their scheme year end date. The VFM assessment will not therefore form part of the chair’s annual governance statement (chair’s statement) for DC occupational pension schemes, but will be included in the independent governance committee chair’s report for workplace personal pension schemes. Where the VFM assessment results in an amber or red rating, the scheme will be required to send the employer a standalone document setting out an overview of the scheme’s VFM assessment, the intended next steps (whether improvements or consolidation) and a clear direction on any action required by the employer.

The new framework will be phased in, with it applying initially to default arrangements in schemes in accumulation. Small self-administered schemes and executive pension plans will be excluded from the framework’s scope. Further details on phasing, the types of schemes in scope during each phase, the definition of “default arrangements” and other elements of the framework will be set out in future consultations. The government intends to legislate for the new framework when parliamentary time allows.

Future of the chair’s statement

The primary audience for the data disclosed under the new framework will be trustees, providers, independent governance committees and employers rather than members. However, the government acknowledges that, once fully implemented, the framework will overlap with the content required for the chair’s statement in a number of areas. The government therefore intends to reduce, and ultimately phase out, the requirements of the chair’s statement.