Out-Law News 4 min. read

Common value for money framework proposed for UK workplace pension schemes

The UK government has proposed a common framework for assessing value for money (VFM) in workplace pension schemes, a significant development that will be “market-shaping” according to pension experts.

The proposed framework is set out in a consultation paper published jointly by the Department for Work and Pensions (DWP), the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR). The consultation focuses on the key metrics, standards and data disclosures that will be adopted for the common VFM framework. The aim is to allow like-for-like and objective comparisons between different defined contribution (DC) pension schemes, regardless of regulator, based on costs and charges, investment performance and service standards.

Pensions expert Tom Barton of Pinsent Masons said: “There’s a lot for the industry to unpack in this consultation. This is a significant, market-shaping development – these framework proposals reduce subjectivity and drive hard towards scale. Workplace schemes are first in line, but it sets the tone for non-workplace too.”

“There will be three grading bands: the trust or provider gives value for money; the trust or provider doesn’t currently give value for money, with identified actions to improve; or the trust or provider fails the VFM test. However, there’s still scope to outperform peers on specific metrics and take credit for ‘best practice’.”

“For the major players, it will be a major disclosure and compliance exercise, building on the existing assessments but with a step change in transparency of data. Smaller schemes already face a number of pressures with a fairly challenging VFM assessment being one, but this takes it up a notch,” Barton said.

Barton Tom

Tom Barton


This is a significant, market-shaping development – these framework proposals reduce subjectivity and drive hard towards scale. Workplace schemes are first in line, but it sets the tone for non-workplace too

The consultation paper considers whether TPR should be given new powers to enforce wind up and consolidation where a scheme is consistently not providing value for its members. This would see members being transferred to better value schemes. There’s a legislative process in place to allow those transfers in occupational pension schemes. Consideration will also be given as to whether specific legislative provisions should be introduced to allow the same sort of transfers in the personal pension space.

Barton said: “We’ve previously explored the design of a without-consent transfer process in the personal pension space. This isn’t straightforward, but there are principles which could be borrowed from the occupational pension world to achieve this.”

Financial regulation expert Hannah Ross said that the value for money framework reflects and complements the shifting focus towards consumer outcomes under the FCA’s new Consumer Duty.

“The growing emphasis on value for money in workplace pension defaults bolsters the FCA’s focus on consumer outcomes and its new Consumer Duty. Regulated firms should consider whether specific rules on disclosing VFM metrics really will support - rather than add to - their obligations under the Consumer Duty, and provide consultation feedback if they do not,” said Ross.

The framework proposes a mandatory step-by-step assessment process, which take into consideration criteria such as investment performance, costs and charges, and quality of services. The evaluation of a scheme’s investment performance under the framework will be both backward-looking and forward-looking. Disclosure of past returns, net of all costs, along with risk-adjustment metrics is proposed. This will be supplemented by a simple forward-looking projection.

On costs and charges, the consultation proposes disclosure of total investment charges, which include employer subsidies in addition to member-borne fees, and administration costs. The rationale is to allow schemes to compare the quality of services against the cost of those services.

Providers of integrated investment and administration services may need to ‘unbundle’ those costs, which “may not be straightforward but should be achievable”, according to the consultation paper. For master trusts, multiple charges should be broken down by cohorts of employers based on assets under management to provider greater transparency.

Under the proposed framework, the assessment of quality of services will look at services that can make a meaningful contribution to long-term outcomes, such as administration, governance and effective member communications to support decision-making. They will be measured by qualifiable metrics. For example, communications could be measured against the resulting member outcomes and outcomes of member satisfaction surveys, while administration services could be measured against promptness and accuracy of core financial transactions and quality of record keeping. However, no standalone governance metric is proposed in the consultation paper.

Once a mandatory step-by-step assessment process is completed, a scheme would need to conclude whether it is value for money; not currently value for money, and identify actions to improve; or not value for money.

A prescribed reporting template is being considered, but consultation on this will be conducted at a later stage. The current consultation seeks feedback on whether to require publication of the value for money data via an official centralised portal or individually by schemes or service providers. Schemes will be required to publish assessment results annually in October. The consultation also asks for views on whether changes to the Chair’s Statement are required to avoid duplication with the value of money requirements.

The DWP proposes a phased implementation of the new framework. In the first phase, legacy schemes over certain threshold will be in scope and small self-administrated schemes (SSASs) and executive pension plans will be excluded. In the second phase, the framework may be extended to workplace ‘self-select options’, non-workplace pensions and DC pensions in decumulation.

“This second phase has long been talked about now,” said Barton. “It will borrow heavily from experience in the workplace space.”

“The consultation is focused on specific actions in relation to workplace pension defaults. But it also signals the FCA's intention to consider extending the value for money framework to workplace self-select options, non-workplace pensions and pensions in decumulation. Firms might want to think about the impact of the FCA's future direction here, particularly in light of the new Consumer Duty, when considering their development of these wider areas,” said Ross.

The consultation closes on 27 March.  It is expected that responses will feed into further consultations on FCA rules and changes to DWP regulations. The FCA and the TPR first published a discussion paper on value for money in DC scheme in September 2021, and followed up with a feedback statement in June 2022.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.