FCA sets out final rules for assessing value for money in workplace pensions

Under final rules published in a policy paper, independent governance committees (IGCs) will not only assess three key elements of value for money – costs and charges, investment performance, and services provided – they will also have to consider whether an alternative scheme would offer better value for money.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law, said: “This is all very sensitive from a commercial point of view and IGCs and providers will take a keen interest in how the assessments and associated reporting are handled. This includes thinking about how to balance employer-level and aggregate-level assessment of costs and charges.”

IGCs will have to set out their overall assessment on value for money in their reports, and keep relevant evidence for up to six years. While the initial focus is on value for money in accumulation, the same principles apply to pathways investments.

“Governance bodies will need to adapt their processes to accommodate the new requirements with support from pension providers. Where the IGC is also the master trust trustee for the same provider, it will need to ensure it gets value for money assessments right for its respective products,” Barton said.

Barton said environmental, social and governance (ESG) considerations would be an important part of the new regime, although not in their own right. Instead, IGCs are asked to think about ESG in the context of costs and charges, investment performance and services provided.

“This requires IGCs and providers to take a wide view, recognising that ESG has a part of play in all aspects of governance. This keeps things broadly aligned with the DWP’s take on ESG in relation to occupational pension schemes,” Barton said.

The methodology for assessing investment performance and service quality will also be aligned with that for occupational pension schemes. The FCA and TPR recently released a joint discussion paper on developing a common framework for measuring value for money in DC pension schemes, both workplace and non-workplace based.

The FCA said publication of annual reports and data about costs and charges would be due by the end of September 2022, and annually thereafter. Barton said: “This gives a little more time to IGCs who might otherwise be having to change value assessment frameworks very late in the day.”

As part of wider measures noted in the joint discussion paper, the FCA also mentioned again costs and charges and persistent issues in legacy and non-workplace schemes.

“It is expected that further measures in this respect will be taken – and the FCA even talks in terms of ‘intervention’ in this respect. In the meantime, providers are reminded to follow existing guidance about fair customer outcomes, treating customers fairly, and the new consumer duty principle,” Barton said.