VFM in DC pension schemes – the Government’s consultation response

Value for money in DC pension schemes – the Government’s consultation response

On 11 July 2023, the Department of Work and Pensions (DWP), the Pensions Regulator and the FCA published a joint response (the Response) to the January 2023 policy consultation, “Value for Money: A framework on metrics, standards and disclosures” (the Consultation).

The consultation sought views on policy proposals which would require trustees and managers of defined contribution (DC) pension schemes (among others) to disclose data, assess and compare the value for money (VFM) provided by their workplace pension schemes.

The overall aim of the VFM framework is ensure savers in DC pension schemes receive better retirement outcomes by building on VFM assessments and by establishing a consistent approach to measuring VFM across DC schemes. The framework is intended to provide “a transparent, standardised way for schemes to holistically assess and evidence VFM outcomes and the actions they are taking to improve the value they provide to savers” under three components

• investment performance,
• costs and charges and
• quality of services.

Schemes will be required to compare their performance against those able to deliver economies of scale while greater transparency and standardisation of reporting will be introduced across the DC pension market. This should allow trustees to make better informed investment and governance decisions, while increasing the ability of employers to compare value and performance between DC schemes when choosing where to automatically enrol their employees.

A shift of focus towards value (by requiring schemes to consider factors critical to longer term saver outcomes) rather than simply cost will help prevent pension savings being eroded in underperforming schemes for long periods of time.

It should also lead to DC schemes investing in a broader, more diversified, range of investment opportunities (including, listed and unlisted asset classes). The Response notes that it has been ‘a key priority’ for HM Government to encourage schemes to invest more in productive assets, with the potential for higher returns for savers and boosting economic growth.

The VFM proposals should also identify schemes which lack the scale necessary to deliver real value for savers and should accelerate the consolidation of underperforming schemes with better run schemes – it is felt that this would lead to greater investment opportunities as a result of economies of scale, leading in turn to better overall outcomes.

What happens next?

The Response notes that underperforming schemes will be required to take immediate action to improve or, where this is in savers’ best interests, to wind up and consolidate.
The VFM framework will be implemented in phases and will require primary legislation to introduce – the DWP, Pension Regulator and FCA intend to consult on draft regulations and FCA rules for the detailed requirements.