Early in February the Department for Work and Pensions, The Pensions Regulator and the Financial Conduct Authority published their long-awaited value for money consultation.
It proposes introducing a common value for money (VFM) framework, initially for workplace pension default arrangements, including legacy schemes, but ultimately for all defined contribution pensions: workplace, individual and in decumulation.
The aim is to enable those running pension schemes to compare and improve the VFM they provide while driving competition and removing under-performing schemes from the market.
The government and both regulators say this should lead to better member outcomes in the longer term, making every pound saved count.
The consultation makes it clear that VFM is not just about costs and charges, it is also about savers getting good value from their investment and receiving a quality level of service.
The VFM framework is likely to accelerate DC occupational scheme consolidation into larger pension schemes, especially master trusts, in time leading to far fewer but larger pension schemes, hopefully providing better member outcomes.
It is expected that employers (often supported by advisers and employee benefit consultants) will use the outputs of the framework to check that their scheme is VFM by using the framework when selecting a scheme or provider.
What happens now?
All pension scheme trustees and independent governance committees carry out VFM assessments and publish their findings online, but they do not do these in exactly the same way, or at the same time, which makes comparisons challenging.
The VFM framework will change all of this, mandating a consistent, transparent approach published each October.
The DWP and regulators have not set the date from when the first VFM reports will have to be published, but we know it will be a future October date.
There is still a considerable amount of work to be carried out, including potentially primary legislation and further consultations, including on DWP regulations and FCA rules, as well as giving the pension industry enough time to collect and analyse the required data.
There will also be links into the FCA’s consumer duty. While the FCA says the VFM framework is wholly consistent with its consumer duty, this needs too be examined in detail.
The earliest date for publishing VFM reports is likely to be October 2025 to allow time for the government to legislate, the regulators to publish rules and guidance, and the pension and investment industry to collate the required data. It is possible that the UK General Election, which must take place by January 2025 at the latest, could stall progress.
The DWP and regulators are expected to publish their response to the consultation and next steps before the July 2023 parliamentary recess.
Eventually all DC pension schemes, both in accumulation and decumulation, will have to produce and publicly publish annual VFM reports.