In a move that will surprise up to a million and a half employers , it looks like assessing its chosen workplace pension will become part of the employer’s duties.
Answering my question at a session of the PLSA’s 2023 Investment Conference, Des Healy said for the first time that the DWP had moved its position over the course of the consultation and would be involving employers in the assessment process.
Unless there is a radical change in the VFM assessment process, the heavy lifting will be done by trustees and GPP providers who will need to rate their schemes red, orange and green for performance, cost apportionment and quality of service. Healy added that these tests would be robust and would require schemes to beat certain benchmarks.
The proposition is intriguing as it opens up the likelihood that employers will have to engage with not just auto-enrolment compliance but the quality the scheme is providing for their and their staff’s money. The DWP has made it clear that should it find that a workplace pension is not delivering to its benchmark, the framework will require schemes to be withdrawn.
In Australia, the first failure of a scheme results in it losing future contributions and the second requires assets to be passed to another provider , a process known as consolidation.
While it’s expected that the majority of large workplace pension schemes will continue to give value for money, many trustees , commercial providers and even insurers face an existential threat if the tests aren’t passed.
I sat next to Robin Ellison when the announcement was made and he confirmed my opinion that this widens the scope of the VFM framework considerably.
Why get employers involved?
The Government’s known since the publication of the OFT report that employers are not good buyers of pensions.
Despite this , employers were able to choose a workplace pension without having to take advice
Consequently . many decisions taken in the later part of AE staging were made with little or no due diligence , let alone a formal VFM assessment. The suspicion is that many employers are allowing payments to be made into workplace pensions that aren’t offering value for money – as determined by the DWP’s tests.
Though the VFM Framework won’t need an adviser to explain it, I expect demand for advice to pick up , especially where VFM assessments are unfavorable. Many employers have grown since the start of auto-enrolment and the amounts in workplace pensions will have grown exponentially. What started out as a payroll compliance exercise is now an employee benefit worth nurturing and promoting.
Currently , the only criteria that a workplace pension needs to be eligible for auto-enrolment is that it is accepted by the Master Trust Assurance Framework, meets the approval of the FCA having an independent governance committee or GAA or is compliant with AE regs is a single employer occupational scheme.
There are a wide variety of definitions of VFM being applied and more than a suspicion that where schemes mark their own homework, the evaluation process shows VFM as positive.
The new VFM framework will operate on a standardised bass across all three types of scheme , begging a number of questions
- Will the VFM framework take over from trustee Value for Member statement and indeed the statements on VFm made by IGCs and GAAs?
- Will VFM assessments be generic or employer specific? Nest has around 1m employers with NOW and People’s pension having numbers well into six figures. These schemes tend to offer a standard default and standard terms and would expect to publish a standard VFM assessment
- Will those providers who underwrite terms and offer employer chosen defaults provide individual VRM assessment based on what members receive rather than standard assessment.
- Will the proposed system of net performance testing be fit for the purpose?
I have long thought that the VFM Framework would need to have a purpose to match the effort put into its construction.
It now looks like the consultation response will be produced sooner rather than later, I am told that it is nearly completed and awaits only the sign off of senior civil servants and the Minister, we may see if in June or July. What needs to follow hot on the consultation’s heels is draft regulations that can be set before parliament as soon as possible.
Bearing in mind the time taken to get previous pension bills through both houses any delays beyond autumn risk the VFM framework being washed up prior to the next election.
Normally I would expect slippage, but not from Des Healy, my expectation is that the VFM framework will dominate the pensions policy agenda. With the pensions dashboard being given another big kick down the road today and with no sign of an end to the DB funding code saga, it looks like the DWP are clearing the way for the smooth procession of the VFM framework onto the statute books next summer.
That is unless they make him the next Celtic manager.