Value for money back under the spotlight
The Financial Conduct Authority (FCA) and the Pensions Regulator have issued a new joint consultation on their long-awaited value for money (VFM) framework for workplace defined contribution (DC) pension schemes.
The revised plans aim to take effect from 2028 and follow industry criticism of the FCA's original proposals issued in 2024. The Regulators have softened some measures, but the core principles stand. The Regulators remain focused on improving transparency, comparability and competition in the pensions sector.
We set out below:
- the background and scope of the new regime;
- an overview of how the VFM framework will operate;
- a commentary of how the proposed framework has changed since the FCA's earlier consultation; and
- developments to watch out for in preparing for the new regime.
Background
The FCA consulted on a VFM regime in relation to contract-based schemes in 2024 (the "2024 Consultation", see WHiP Issue 111 for more on this). The Pension Schemes Bill introduces a power to make regulations to introduce the VFM framework for trust-based occupational DC schemes (see WHiDC: Pension Schemes Bill special).
Which schemes will fall in scope?
The VFM regime will apply to default arrangements of workplace DC pension schemes – i.e. the default strategy of qualifying auto-enrolment (AE) schemes and legacy "quasi-defaults" which predate AE.
Executive Pension Plans and Small Self-Administered Schemes will be excluded from the framework. Exemptions will also be available for contract-based arrangements closed to new employers that are undertaking a transfer of all members to another arrangement and trust-based schemes that have notified the Pensions Regulator that they have commenced wind up.
How will the VFM framework operate?
Torsten Bell, the Pensions Minister, describes the framework as "being straight with people and making sure people's savings work as hard as they did to earn them".
The Regulators state four aims:
- Consistent measurement and disclosure – trustees and firms must measure and publicly disclose investment performance, costs, and service quality using metrics designed to assess VFM effectively.
- Objective comparison – those responsible for oversight (trustees for trust-based schemes, and independent governance committees (IGCs) and governance advisory arrangements for contract-based schemes) can assess performance against the market on a consistent, objective basis.
- Transparency of outcomes – assessment results must be publicly disclosed.
- Action on poor value – trustees and firms must take specified actions where an arrangement is assessed as not delivering VFM.
The assessment process will involve three steps:
Employers will have a central role in the regime. The Regulators intend that schemes will provide them with the information to select arrangements that deliver long-term value, leading to better value pensions, without savers themselves having to take action.
What's changed in the latest consultation?
The fundamentals of the new framework remain unchanged from the 2024 Consultation. Schemes must publish key metrics every year, covering investment performance, asset classes, costs, charges, and service. Trustees and providers will need to assign a VFM rating to their default arrangement(s). Underperforming schemes face consequences – e.g. taking steps to improve, notifying contributing employers of poor performance, closing to new business and/or ultimately transferring members elsewhere.
The revised framework, though, proposes a more streamlined and nuanced approach. In several respects, it is designed to be more objective, and more accommodating of innovative investment strategies:
1. Forecasting investment performance:
The most notable new requirement is the inclusion of forward-looking metrics. Rather than focusing solely on past performance, schemes will need to set out expected net returns and risks over the next ten years. Schemes will be able to decide their own bespoke methodology and assumptions when calculating these metrics (tailored to the scheme's chosen investment strategy).
Guardrails will apply to limit the risk of unrealistic or inflated metrics: (i) schemes will need to record, but not disclose, their assumptions; and (ii) they must also obtain and consider advice from an appropriate third-party on the reasonableness of the assumptions.
Comment
The use of bespoke forward-looking metrics is intended to support the Government's agenda to drive pension scheme investment in productive, long term asset classes, and alleviate some of the potential obstacles to private market investment. For instance, the Regulators have stated explicitly that they "do not want to discourage trustees and firms from finding ways to manage the potential ‘lag’ in returns from assets with a projected J curve shaped return."
A focus on future performance could also reduce the risk of herding towards benchmarks focused on short-term returns. A risk remains that the use of non-standardised forward-looking metrics could make it harder for employers and savers to compare schemes and could potentially increase the risk of challenge where actual performance falls short of projections.
2. Streamlined reporting:
(a) Past performance and charges: Past performance will still need to be assessed and reported on three levels:
(i) Gross investment performance (net only of transaction costs).
(ii) Gross investment performance net of investment charges.
(iii) Gross investment performance net of all costs and charges.
Notably, one hard edge has been softened. The previous proposals required schemes to report 15-year historic data on investment performance and charges. That has gone. Instead, backwards looking investment performance data must be disclosed for periods of 1 year, 3 years and 5 years where available, and 10 years where reasonably practicable to obtain. As for how performance data is calculated, the original proposal was to calculate based on the annual performance of multiple cohorts of members as they each pass through a given point in the retirement journey, aggregating those performances into a geometric average. In response to feedback, it is now proposed this be changed to consider the average experience of multiple cohorts of members as they pass through a specific year to retirement points (i.e. arithmetic averaging).
The Regulators have also dropped the proposal to require schemes to distinguish between service costs and investment changes. Both updates will be a welcome reduction in the reporting burden for schemes.
(b) Service quality: The 2024 Consultation proposed five service metrics, being (i) secure, prompt, and accurate transactions, (ii) member satisfaction (iii) retirement decision-making support for members (iv) ability to easily amend pensions and (v) supporting members to engage with their pensions. The Regulators are proposing minor changes to the first two ratings for record-keeping and assessing member satisfaction. The initial proposal to adopt a standardised member survey will now not be included at launch, with work continuing across industry to develop one over the medium term. The remaining three metrics will also not now be required when the VFM framework is launched and will instead be developed following further consultation with industry. However, a new metric will be introduced to require information about member nomination of beneficiaries.
Comment
Despite being scaled back, the revised proposals will still impose a material compliance burden. Slimming down historic metrics means less paperwork, but more subjective, forward-looking metrics add another layer of work and judgement for schemes. Smaller, own-trust schemes may have the most to do with the fewest resources. This could drive further consolidation, with smaller schemes transferring to bigger providers better equipped to shoulder the reporting burden.
3. Comparison against commercial market comparator group:
Instead of letting schemes cherry-pick three comparison groups, schemes will need to use a single commercial market comparator group, drawing from a central data repository. The commercial comparator group will consist of contract and trust-based arrangements that are open to new employers which are either firm or scheme-designed multi-employer arrangements (i.e. no bespoke arrangements or single employer trusts).
Comment
This approach could reduce the scope for gamesmanship and lead to a more complete, objective and consistent approach to measuring value (provided the central data set is efficiently kept up to date, is robust and includes sufficiently granular detail on the scheme specific context for that data).
4. Four-point ratings system:
The Regulators are also proposing a new, four-tier “RAGG” rating (rather than the three tier "RAG" rating proposed originally). Adding “light green” and “dark green” above “amber” and “red” offers welcome nuance, giving employers and savers a more granular view. Schemes rated amber or red will be barred from taking on new business, and red cases must transfer members elsewhere if that is in their best interests. Amber rated schemes will be required to prepare and submit an improvement plan setting out how they will achieve a green rating with specified timescales for prescribed actions or set out other arrangements such as a transfer of members to a better value arrangement. Few arrangements are expected to attain a dark green rating.
Comment
More nuanced ratings may mitigate the risk of cliff-edges and herding toward uniform investment strategies, where schemes can avoid "standing out from the crowd".
What happens next
- Feedback to the consultation: The joint consultation closes on 8 March 2026. It includes draft rules and guidance for contract-based schemes. The VFM framework will apply to trust-based schemes through regulations made under the Pension Schemes Bill currently before Parliament. Responses to the consultation will inform both the development of these regulations and the draft rules and guidance for contract-based schemes.
- Further engagement: The FCA plans to offer roundtables and stakeholder events to discuss practical aspects as they develop the framework. The Government intends to consult on draft regulations to implement the VFM framework for trust-based schemes and the Pensions Regulator will consult on any changes to its Code of Practice or guidance. The FCA is also likely to undertake a further consultation.
- Implementation: Final rules will be confirmed once the Pension Schemes Bill receives Royal Assent. The Regulators are currently expecting that the first VFM assessments will be required in 2028. In the meantime, workplace DC providers and trustees and employers with DC or hybrid schemes should monitor developments in the regime, consider responding to the consultation and start reviewing data.
