FCA launches consultation on its Value for Money Framework

The Financial Conduct Authority (FCA) has now launched its "Value for Money Framework" consultation, fulfilling its promise to do so in last year's Mansion House reforms and reiterated in the Autumn Statement.

At 220 pages, the Consultation Paper outlines in detail the wider context of the consultation, the schemes which will be in scope, the key measures of value for money (which include investment performance, asset allocation disclosure, costs and charges, and quality of services), the intended method of assessment and actions for arrangements which are found to offer poor value. The FCA also describes the 'Disclosure Requirements' as central to the assessment process.

The intentions of the FCA, working alongside the Pensions Regulator and the Department for Work and Pensions, are to reduce the number of savers with workplace personal pensions that are delivering poor value, and to drive better value for money across the workplace DC market through greater scrutiny and competition to provide long-term value rather than focusing on cost.

The FCA has outlined the four elements introduced by the Framework:

1. It requires the consistent measurement and public disclosure of investment performance, costs and service quality by firms for all such arrangements against metrics the FCA believes allow VFM to be assessed effectively.
2. It enables those overseeing and challenging an arrangement’s value – Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) for contract-based schemes – to assess performance against other arrangements and requires them to do so on a consistent and objective basis.
3. It requires public disclosure of assessment outcomes including a 'red, amber, green' (RAG) VFM rating for each arrangement.
4. It requires firms to take specified actions where an arrangement has been assessed as not VFM (red or amber).

The FCA has specifically expressed interest in feedback from firms operating contract-based workplace pensions, their IGCs and GAAs, and the trustees of trust-based schemes. The consultation will close on 17 October 2024, following which the FCA will publish a final policy statement including Handbook rules and guidance which sets out the VFM Framework to be implemented.

Whilst we anticipate that the new Framework will encourage better value for money across the workplace defined contribution pensions market by promoting increased transparency, competition, and improved member outcomes, there are concerns that the focus for schemes will be shifted to cost, rather than value, or that too much focus on value removes focus on key issues such as ESG investment or member engagement.

We will if course provide further updates following the publication of the final policy statement, Handbook rules and guidance. If you would like to discuss anything raised in this blog in more detail in the meantime, please get in touch with a member of the pensions team or your usual Brodies contact.