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• Financial Conduct Authority consults on new VFM framework
• HMRC’s latest Pension Schemes Newsletter
• Save the date: Pensions Academy Online, 17 and 19 September 2024

Welcome to your weekly update from the A&O Shearman Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.

Financial Conduct Authority consults on new VFM framework

The Financial Conduct Authority (FCA) is consulting on a value for money (VFM) framework for savers in DC default arrangements. This consultation relates to FCA-regulated arrangements, but the government intends to legislate to apply equivalent measures to trust-based schemes. Responses will be considered jointly with the Department for Work and Pensions and the Pensions Regulator (TPR); TPR encourages trustees to engage with this consultation.

The proposed framework has four key aspects:

1. Consistent measurement and public disclosure of investment performance, costs, and service quality against specified metrics. Disclosure of past investment performance would be required at three levels – gross investment performance (a) net of transaction costs, (b) net of investment charges and (c) net of all costs and charges, in each case over specified reporting periods. In addition, risk-adjusted metrics will be required. Asset allocation disclosures will also be required, including the split between UK and non-UK assets.

   Disclosure of service costs, investment charges and total costs and charges will also be required, over specified reporting periods and for each of the 30 year-to-retirement, five year-to-retirement and at- retirement member cohorts. On service quality, the FCA has proposed five qualitative indicators with a range of quantitative metrics for each, but seeks feedback on whether there are better alternatives.

2. Assessment of performance against other arrangements on a consistent and objective basis: schemes will be required to provide a comparison with the arrangements offered by at least three other providers, at least two of which have total DC assets exceeding GBP10 billion and at least one of which is a contract-based and one a trust-based To support consistency, at least one of the comparators must be the same as the previous year. The metrics on investment performance and on service quality relative to service cost would be compared to reach an assessment of a scheme’s ‘provisional overall value’, which can then be contextualised to provide a red/amber/green (RAG) VFM rating for the scheme. An amber rating indicates that the arrangement can be improved within a reasonable period of time so that it offers VFM. A red rating means that the arrangement cannot or will not be improved within a reasonable period of time.
3. Disclosure of assessment outcomes will be required in an annual report that includes VFM data, an explanation of the assessments made and commentary on any actions to address poor value.
4. Mandated action where an arrangement has been assessed as not providing VFM: this would include communicating a red or amber rating to any employer paying contributions, creating an action plan tomaddress the poor VFM rating and (for red-rated arrangements) considering whether savers should be transferred to an alternative arrangement.

The previous government suggested, in a press announcement prior to Budget Day in March 2024, that the intention was to ensure that key disclosures would be in place by 2027. However, pending decisions by the new government, the FCA’s consultation makes no comment on timing and leaves open whether it might defer implementation until the full framework is ready. The consultation closes on 17 October 2024.

Read the consultation paper

HMRC’s latest Pension Schemes Newsletter

HMRC’s latest Pension Schemes Newsletter (number 161) provides an update on amendments to address technical issues with the legislation that abolished the lifetime allowance. Regulations are to be introduced as soon as possible after the summer recess. HMRC has previously confirmed that these will have retrospective effect.

The newsletter also includes a reminder that administrators should take action to migrate schemes to the Managing pension schemes service where this has not already been completed.

Read the newsletter

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