LawDeb responds to FCA consultation on ‘Value for Money’ framework

“The UK DC pensions landscape is in reasonably good shape, and we believe allows for the provision of good outcomes for members. Regulatory initiatives that improve those outcomes should be welcomed, but must consider both the intended and unintended consequences. The Value for Money framework - as it stands – has the potential to risk driving provider behaviours that, in our opinion, are not in the best interests of savers.

Our most pressing concern is the structure of the RAG rating approach, which could potentially see anything other than a green rating perceived as a “fail” with significant consequences for providers rated amber and red. As such, we expect providers will seek to avoid an amber rating at all costs, which in our opinion is likely to disincentivise investment in private market asset classes, due to the costs and longer payback periods typically associated with these asset classes. Furthermore, if employers act quickly to move away from ‘amber’ rated arrangements, there is the risk of a ‘run’ on the arrangement which could terminally damage the provider and, ultimately, damage value for the remaining members. Finally, on this point, it is possible that, in striving to maintain a ‘green’ ranking, providers shy away from innovative investment strategies and instead, stay on safe ground. The full potential consequence of this is seeing all providers herding around a median asset allocation.

Instead, consideration should be given to a more nuanced rating system. One that moves away from a binary ‘pass’/’fail’ approach, to a more significant ranked scale - 1-5 or even 1-10 - which would allow providers to acknowledge room for improvement without resulting in material sanction from the market.”

Rekha adds “A separate concern lies in the expansion of the framework from contract-based arrangement to the trust based pension environment, and specifically to single employer trust based pension arrangements. While some small pots lack the scale to deliver a competitive solution under VfM, many paternalistic employers have worked hard with trustees to create excellent outcomes for members and incorporate benefits which are infeasible within the mastertrust marketplace. These high-performing arrangements should not be penalised by the burden of the framework.

We also have concerns about the backward looking nature of the assessment, as it could misrepresent the quality of an arrangement at the point of assessment and lead to poor decisions being made by the users of the data. We believe there could be merit in incorporating forward looking risk and return metrics.

Finally, we must be clear; whilst Value for Money is an important consideration, the key factor that will determine whether a saver has adequate pension provision is the amount of contributions paid into the arrangement.  This, along with efforts to address issues such as financial education, diversity, fairness, and accessibility in pensions, require more focus, initiatives, and regulatory attention.”

View our Executive Summary here and do reach out to Elizabeth or Rekha to discuss our full response.