The Department for Work and Pensions (DWP) has today (30 January 2023) published a consultation which is the culmination of joint work with The Pensions Regulator (TPR) and the Financial Conduct Authority setting out a standardised framework of metrics to assess value for money (VFM) across defined contribution (DC) work-place pension schemes.
The policy proposals seek to improve retirement outcomes for millions of DC pension savers by promoting a focus on transparency, competition, and innovation.
The consultation sets out details of the three key elements of the VFM framework:
The DWP is also considering whether TPR should have new powers to enforce wind up and consolidation where a scheme is consistently failing to offer value to its members.
Since October 2021, occupational DC schemes with assets worth less than £100m have been required to complete a detailed VFM assessment and report their conclusions to TPR, including whether they propose to consolidate or make improvements if they do not provide good value for members. The new VFM framework will replace this assessment and the DWP expects at this point that those schemes that are not providing value will have already wound up, be in the process of winding up, or to have made improvements.
The DWP is also looking to address the growth of deferred small pots and the challenge that this presents to VFM and has today published a call for evidence seeking views and evidence on the optimal large-scale automated solution that can deliver a material reduction in small pots and overall net benefits for savers. The VFM framework will complement this work by strengthening the governance that applies to schemes. A meaningful reduction of deferred small pots will improve outcomes for members and providers by removing inefficiencies and wasted administration costs.
The DWP suggests the disclosure of net investment returns without risk adjustment could hamper comparability of performance, be misleading or incentivise excessive risk-taking. It therefore believes that it is important to consider requiring disclosure of the degree of risk associated with reported investment performance. For the VFM framework, the DWP is proposing the disclosure of two specific risk-adjusted metrics to be reported alongside net returns. It is also proposing similar disclosures under this VFM framework to those set out in a separate consultation on ‘Broadening the investment opportunities of defined contribution pension schemes’, the response to which was also published today as well as revised statutory guidance.
The new VFM framework will be implemented in phases (although the DWP has not committed itself to delivery in a specific year) with the first phase applying to ’default arrangements’, a definition with which DC schemes will already be familiar as part of their annual governance reporting, before being widened to other arrangements in phase two. The proposal is to require schemes to disclose their framework data using a standard template (possibly via a public website or a centralised portal) by the end of the first quarter of each calendar year. The template has yet to be designed but will draw on data as at a single point (30 June) for all schemes. Schemes must publish an annual VFM assessment report by the end of October, which means that some may need to consider changing their scheme year end so they can meet this deadline.
As part of this consultation, the DWP is also considering the impact of the new framework on the structure and purpose of the annual Chair’s statement, potentially splitting into communication and governance documents.
The DWP states that “without fair comparisons, there cannot be effective competition and expects the VFM regime to drive improvement by encouraging underperforming schemes to improve performance, consolidate or exit the market; and for all schemes to use the disclosures to understand best practice. Over time, this will create an environment that leads to continuous improvement, healthy competition, and innovation throughout the DC pensions industry”.
The consultation runs until 27 March 2023.