On August 8, the Financial Conduct Authority (FCA) published a consultation setting out new rules and guidance for the Value for Money (VFM) framework for Defined Contribution (DC) pension schemes. The FCA aims to establish a consistent and transparent framework for assessing the value delivered by pension schemes, focusing on key metrics such as investment performance, costs, and service quality.

Key Takeaways:

• Streamlined VFM Assessment: The framework introduces standardised metrics for consistent measurement and public disclosure of investment performance, costs, and service quality across DC pension schemes.
• Role of Governance: Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) are tasked with assessing the VFM of pension schemes, with mandatory public disclosure of assessment outcomes, including a Red, Amber, Green (RAG) rating.
• Actionable Outcomes: Firms will be required to take specific actions where schemes are assessed as offering poor value (Red or Amber ratings).

Breakdown of Key Points:

• Unintended Consequences: The FCA seeks feedback on potential unintended consequences of the new rules. These include the risk of herding, an increased focus on cost at the expense of long-term value, and concerns that qualitative metrics might not effectively drive value for members.
• Scope and Thresholds: The VFM framework will apply to default and quasi-default arrangements within DC pension schemes. Quasi-default arrangements refer to pension arrangements where contributions are invested without the employee making an active choice in legacy workplace pension schemes.
• Performance Metrics: The framework proposes to measure investment performance using gross and net returns over 1, 3, 5, 10, and 15-year periods where possible. These metrics are designed to offer a clear picture of past performance and allow for meaningful comparisons across different pension schemes.
• Risk Metrics: The VFM framework includes risk metrics such as maximum drawdown and annualised standard deviation (ASD) of returns. These metrics are intended to assess the volatility and downside risk of pension scheme investments.
• Asset Allocation Disclosures: The framework mandates the disclosure of asset allocations within pension schemes, including the percentage of investments across various asset classes such as cash, bonds, equities, and alternatives.
• Costs and Charges: The framework requires detailed disclosures on costs and charges, including the unbundling of costs associated with different services provided by pension schemes.
• Quality of Service: The consultation highlights the importance of service quality as a component of VFM assessments. This includes evaluating the effectiveness and efficiency of administration services, member communications, and overall customer experience.
• Assessment and Required Actions: The framework specifies that IGCs and GAAs must conduct annual VFM assessments, with the requirement to assign a RAG rating based on their findings. Where schemes are found to be offering poor value (Red or Amber ratings), firms must take specific actions to address these issues, such as reducing charges or improving service quality.
• Disclosure Requirements: The main disclosure requirements under the framework include the public release of VFM assessment outcomes, the RAG rating of schemes, and detailed data on investment performance, costs, charges, and asset allocations. These disclosures are designed to promote transparency and allow for better-informed decisions by stakeholders and pension savers.

The consultation is open for feedback until 17 October 2024. For further information please contact Nicholas Smith ([email protected])