Value for Money: Better Retirement Outcomes and Greater Transparency – Further Consultation on New Framework for DC Pension Schemes

The Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) are consulting further on the new value for money (VFM) framework for DC pension schemes. The consultation is intended to serve as:

• The FCA's response to its 2024 consultation on the proposed detailed rules and guidance for contract-based schemes (to be set out in the FCA Handbook);
• A further consultation on amendments to those rules and guidance in light of the feedback to the 2024 consultation; and
• A discussion paper, inviting input which can be used in developing the regulations that will set out the VFM requirements for trust-based schemes. The intention is that the new framework will be consistent across contract-based and trust-based schemes.

The New Framework

The new framework will apply to default arrangements in DC schemes that are being used for automatic enrolment and that meet prescribed criteria. This includes default arrangements in DC sections of hybrid schemes where the DC section is being used for automatic enrolment. Where a scheme has more than one default arrangement, the framework will apply separately to each default arrangement.

The new framework will comprise four elements:

1. Measurement: Schemes will be required to measure and publicly disclose their default arrangement's investment performance, costs and charges, and service quality using prescribed metrics. They will also be required to make prescribed asset allocation disclosures;
2. Comparison: Schemes will be required to compare their default arrangement's performance against the market on a consistent, objective basis. They will then need to assign a red/amber/green (RAG) rating to their default arrangement indicating the level of VFM that it delivers;
3. Disclosure: Schemes will be required to publicly disclose their default arrangement's RAG rating, together with prescribed information on investment returns and an explanation as to why that rating has been assigned. For trust-based schemes, TPR intends this information to be included in a standalone assessment report, rather than in the chair's annual governance statement; and
4. Action on Poor Value: Where a default arrangement is assigned a red or amber rating, the scheme must take certain prescribed actions. Depending on the specific VFM rating achieved, these include notifying the FCA/TPR and employers, closing the arrangement to new employers, submitting action and improvement plans, and transferring members to an arrangement which offers better VFM. Details of the planned actions must be included in the scheme's assessment report.

Proposed Changes

The key changes proposed include:

• Introduction of forward-looking investment metrics in addition to backward-looking investment metrics;
• A reduction in the number of backward-looking investment performance metrics and costs metrics;
• Removal of engagement-related metrics from the service quality metrics to allow further industry engagement on development of those metrics;
• Comparisons of value against a commercial market comparator group rather than three other schemes. This would be enabled by a central VFM database into which all scheme VFM data would be entered for the purposes of comparison and potentially publication;
• Reduction of the VFM assessment process from four steps to three steps; and
• A four-point RAG rating system (in place of the three-point system originally proposed). The four ratings will be:
  • Dark green: The default arrangement is outperforming most in the comparator group and there are minimal areas where improvements could be made;
  • Light green: The default arrangement is delivering VFM, but there are areas that could/should be improved;
  • Amber: The default arrangement is not delivering VFM, but the scheme believes improvements are possible within three years to deliver VFM; and
  • Red: The default arrangement is not delivering VFM and cannot be improved to deliver VFM within three years.

Timings and Next Steps

Actual implementation is some time away, but advanced preparation is going to be helpful for schemes.

The consultation closes on 8 March 2026. The Pension Schemes Bill currently going through Parliament includes provisions to enable the necessary regulations to be made for trust-based schemes. Once the Bill has received Royal Assent, the government will consult on draft regulations and TPR will consult on any necessary codes of practice or guidance.

The intention is the new framework will come into force at the same time for both contract-based and trust-based schemes. Subject to the completion of the parliamentary process for the legislation for trust-based schemes, the current expectation is the first assessments under the new framework will be required in 2028.