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UK regulators combine over value for money in all DC pension schemes

Regulators have joined forces to apply a more rigorous value to money regime for defined contribution (DC) pensions, including the 18.7 million non-workplace DC scheme members.

The UK’s Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) have published 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 paper builds on measures that will shortly come into force for trust-based DC schemes and schemes with a value of below £100 million requiring them to report investment performance.

The proposed framework looks at value through three lenses: investment performance; scheme oversight provided, including customer service levels such as data quality and communications; and costs and charges.

The intention is for trustees and independent governance committees (IGCs) to use the framework to compare their scheme with similar schemes. Accordingly, schemes will be expected to make their data publicly available.

Barton Tom

Tom Barton


The onus is on the pensions industry to come up with solutions – with the possibility of a more interventionist approach if it does not

The information that trustees will have to disclose is focused on past performance, to be disclosed net of costs and charges because this reflects the members’ experience of investment return. The regulators said the quality of the overall portfolio composition, not just the performance of component parts, was important to achieving value for money, bearing in mind the appropriate degree of risk for savers.

The FCA and TPR said their aim was to achieve “genuine comparability” for groups of similar savers, and enable trustees seeing continued underperformance to change their investment strategies if need be.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law, said: “As well as drivers of consumer protection and consolidation, there’s a competition and markets backdrop to this because members just aren’t engaged enough to make good choices for themselves”.

“Those pension scheme members are also re-branded ‘savers’, perhaps acknowledging that DC schemes are often just savings arrangements rather than schemes through which pensions can be accessed directly,” Barton said.

Barton said the key strategic questions were around a framework to enable industry to compare apples with apples and assess comparative performance, through standard metrics or standard reporting formats or other benchmarking mechanisms.

“Where might this eventually lead us? A league table? An Ofsted report for pension schemes? It will also be important for schemes and providers to have room to be distinctive and different, and get credit for that,” Barton said.

“Whatever the case, the onus is on industry to come up with solutions – with the possibility of a more interventionist approach if it does not,” Barton said.

The regulators acknowledged the framework would impose additional costs that would be passed on to savers, but said the long-term benefits of achieving value for money would make this cost worthwhile.

The proposed framework also examines how best to improve cost disclosure and transparency. It outlines two options for disclosing administration charges and transaction fees.

The first option would see disclosure focused on capped administration charges, and uncapped transaction costs. This data is already collected by trustees and IGCs.

The second option is to split the current definition of administration charges into two components – fund management and pensions administration – to help decision makers such as trustees and employers

“This additional granularity just relates to disclosures - there’s no accompanying suggestion that the charge cap would be altered as a result of this,” Barton said.

Barton said the regulators had recognised that costs in a workplace context reflect strong competition at the large-scale end of the market, but had also noted cost issues in legacy products, non-workplace pensions and smaller workplace DC schemes. The pensions industry is asked to play its part in resolving this.

“Large workplace pension schemes, including master trusts, need to consider the paper in conjunction with the Department for Work and Pensions call for evidence published on 21 June 2021, since this will together set the tone for governance generally and consolidation too. Smaller workplace occupational pension schemes already have the measures for sub-£100m to contend with and this will remain the primary focus,” Barton said.

“Non-workplace DC schemes in particular will need to consider consumer protection in ‘set and forget’ products, with solutions taking account of valuable features such as guaranteed annuity rates. This may involve legal mechanisms already deployed to good effect in the workplace space,” Barton said.

The closing date for comments on the proposed value for money framework is 10 December 2021.

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