Green light for Value for Money

Value for Money will make comparing schemes easier but what about ratings? 

It seems like pensions are more in the political spotlight than ever, between the Government’s Pensions Review, October’s Autumn statement, and a Pensions Bill in 2025.  

One big initiative, which has been years in the making but is now getting close to delivery, is the new Value for Money (VFM) Framework.  

Just before the consultation closed in mid-October, I had the pleasure of taking part in a VFM panel session at the ABI’s recent Pension Investments: What’s Next? conference. It was great to feel the openness in the room and the commitment from both industry and regulators to get it right.

What is VFM for?

The VFM framework has a number of clear objectives, which include: 

• Requiring schemes to disclose investment performance, charges and service quality data, so they can be compared on a like-for-like basis, including across contract- and trust- based schemes 
• Shifting the emphasis from price to value 
• Placing pressure on schemes to improve, and, if they can’t, to wind-up. 

The Government also has a stated ambition of moving to a smaller number of larger, well governed schemes. Their hope is that better value will be delivered through scale, better governance and the ability to invest in a wider range of assets, including illiquids.

How will VFM work?

To try and condense a 220-page consultation into a couple of paragraphs is tough, but at a high level, schemes will report on a wide range of investment, charge, and service metrics for each calendar year. This will be broken down by ‘arrangements’ – broadly meaning scheme defaults. IGCs and Trustees will review the data from their own scheme and comparator schemes and come to some judgements about whether their arrangements offer value for money.  

If they do, they’ll assign a Green rating and all is well. If they don’t, they will have to decide between an Amber and a Red rating, the distinction being that Amber arrangements can be improved in a reasonable timeframe.

Red alert

Red schemes will be expected to close and transfer savers to a better arrangement. Amber schemes will have to submit their improvement plans to the regulator, inform all their employer clients, and close to new employer business (meaning no new employer clients). Existing clients would still be able to continue contributions, and new employees would still be auto-enrolled.

Concerns over ratings

The pensions industry seems generally supportive of this initiative and is gearing up to make it work. The major area of concern appears to be the consequences of being rated Amber.   Closing to new employer business could prove terminal for some pension scheme operators and it’s felt that a rating which signals areas of improvement, which doesn’t carry terminal consequences, would better support a culture of continuous improvement. 

This could also encourage ‘herding’, where schemes are too fearful to differentiate themselves from the pack. Innovation could be stifled if the benefits of outperformance are modest, and the consequences of underperformance could be terminal – especially for smaller growing schemes. This has happened in Australia, creating a concentration risk which could destroy customer value if economic events trigger a significant requirement to trade assets.  

Then there’s the question of whether some IGCs and Trustees would be more likely to use the Green rating, even when improvement might be needed. 

Also, the ABI panel discussion considered whether the sheer volume of metrics would be costly and burdensome to produce and are perhaps disproportionate for the VFM assessments. It has been heartening to hear that the FCA is open to rationalising the metrics they have laid out in their most recent consultation.

Benefits for pension members

I don’t want to end on a down note though – far from it!  

The VFM framework does have a lot of potential to improve the market, with consistent reporting that allows ‘apples’ to be compared with ‘apples’ – on a like for like basis – and shines a light on the poor value schemes so they can improve or move savers somewhere better. A more consolidated market is a good thing too – with over £100bn in workplace pension assets at Scottish Widows, we can see the benefits of scale. 

There is a bit more work to do on the fine tuning, and to ensure we avoid unintended consequences, but the direction of travel is positive.