The VFM Framework – not perfect but now fit for purpose.

Illustration depicting a computer screen capture with a value for money concept.

At the back of DWP’s VFM outcome paper, is its new definition of value for money

Our definition of ‘Value for Money’ is that savers’
contributions are being well invested and their savings
are not being eroded by high costs and charges.

Other factors also contribute to whether a saver
achieves good retirement outcomes and so these
should also be included in the concept of ‘Value for
Money’. For example, good customer service to help
savers make the right decisions at the right time may
make a real difference to how much they contribute
and engage with their retirement needs. Good
scheme governance also makes a meaningful
difference to long-term outcomes.

It has deviated from its original course in two important ways

  1. It will measure gross performance and the cost of charges separately and the two will inform on each other independently  to produce “net performance”.
  2. It will put more emphasis on reporting of the three tests to employers – so that all employers participating in a workplace pension will know if they are in a failing or partially failing scheme.

Though it discusses measuring performance in terms of members outcomes (internal rates of return) it decides against doing so, there being little support for our idea. So  “well invested” will mean comparisons of “gross performance” and costs and charges will be calculated separately.

Happily however, users of the VFM Framework will have a simple assessment of value by way of the anticipated RAGs and these will be measured by a TPR established benchmark, not by selected comparisons (the FCA model).

Will the VRM Framework – work.

This is a workable solution to a tricky problem which has the advantage of being operable over all workplace pensions and in due course over non-workplace pensions too. It isn’t perfect but it will achieve the policy objectives of getting employers and trustees to pay attention to the workplace pension. It will not be the means to make choices but it will be the spur that pricks the side of fiduciary intent and that will lead to consolidation.

Whether it will lead to employers demanding higher value product depends on whether a culture emerges which accepts prices may go up.

The difference in cost between accessing a passive pooled fund (or ETF) and investing in a fund deploying to venture capital, is much higher than the Government’s number suggest

Here’s Chris Sier’s comment to New Model Adviser

‘To play with private equity, the starting point is [fees of] roughly 3% to 4% of assets a year,’

‘If you are a defined contribution pension fund, it’s going to cost you a lot more than that because of the capital cost to set the fund up and the liquidity cost to manage the “in and out” mentality that retail consumers have when investing in things. The government’s assumptions are wholly undercutting it in terms of the base cost of private equity.’

The returns from private equity may be several orders higher which still makes the 5% a good deal- but only to organisations that can get on top of these costs and deploy effectively.

The majority of DC funds do not have that level of ambition and are currently caught in a price crunch that makes the argument irrelevant.  However that is likely to change, not least because there appears to be sufficient solidarity amongst workplace pension providers to allow costs to rise to incorporate value.

Without the Compact, I don’t see prices going up but I think there is still a significant risk that value will not improve if organisations like Royal London, People’s Partnership, WTW, Aon and SEI stay outside the Compact. Put another way, without encouragement from the advisory community, the Compact will be priced out of the market.

The VFM Framework will not pick up the value created by shifts in default allocation today, for several years, so – in the meantime – there will need to be a conviction in “value consulting” (already in place at organisations like Muse and Hymans Robertson).

Alternatively, there will need to be further intervention from Government rendering unambitious defaults orange or red. I think it unlikely that the current Government would take that view but it is possible that a more interventionalist Labour Government might. But that is political speculation.

At this time, the VFM Framework will work in creating a larger secondary market for high quality workplace pensions to consolidate poor quality schemes, but it will not work for the next two years and in the short term we are going to need to see change enacted by employers and advisers using proxies for the Framework.

Will the market move?

There has been a recent move among many employers to close their individual DC schemes and participate in multi-employer arrangements, the costs of running a scheme are not value for employer’s money. The announcement that we may see the ability to move GPPs to master trusts without member consent suggests that both TPR and FCA are accepting that trust based governance will eventually win out over contract based.

Right now there is insufficient expertise in the DC consulting market to encourage value over cost (see above) but it is possible that that will change if the actuarial consultancies start taking DC investment consultancy seriously. Right now , we are seeing two of the flag-bearers for value consulting (Dan Mikulskis and Callum Stewart) moving to providers from LCP and Hymans respectively.  They need to be replaced with consultants who can see through Callums 10+10+10 vision.

That will take time as right now I don’t see any reason why the race for the bottom on price will not continue. People cannot instinctively understand how paying more for fund management can increase pensions by £1000 pa. It may take mandation of the 5% rule and that will take a different kind of Government and a different kind of Labour pension minister than the opposition ministers we have had in recent years.


The VFM Framework is what holds the governance of DC together and it is the instrument this Government has chosen to drive a shift from cost to value. It is a good thing and what has emerged from the consultation is workable. It is not as I would like it and I will continue to campaign for better, but it is good enough.

And we should not underestimate how hard it will be to get it implemented. Look at the dashboard.

The outcome paper is pragmatic in its options and sensible in targeting employers as well as trustees to use it. It has made the right choice regarding display of information and it rightly prioritises financial outcomes over quality of service.

I gave the original conception a 95% approval rating and this 98%. But I want 100% – so expect to hear more from me on performance measurement!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to The VFM Framework – not perfect but now fit for purpose.

  1. Con Keating says:

    There is only one problem with this approach – it does not reflect the member performance experience. Using an absence of support for the correct method is the ultimate nonsense. That support is absent precisely because suppliers do not wish the majority of members to realise how poorly they have done.
    Put another way, the proposed method is not fit for purpose from the member perspective.

    • henry tapper says:

      You are right Con, we will continue to press DWP to get a measure reflects what members actually get, now what the industry wants us to think we are getting. Right now , we can have those conversations with employers, trustees and advisers- but the door is closed for this consultation. Transparency will out eventually, it took you and Chris Sier ten years, it may take the same on performance

      • John Mather says:

        Don’t worry about the consultation ending there will be another one before the ink is dry on this one

  2. John Mather says:

    Clearly the problem is not being resolved from the end user point of view. How the outcomes are achieved needs a better analysis of the economic model. Some observations from this week from my analyst friend

    The first measure should be did the asset perform at a rate greater than inflation? Ie was buying power preserved. China and the US are the dominant players

    The recession in the US (and Europe) may not be avoided because the progress in reducing ‘sticky’ inflation has been tardy, necessitating interest rates to stay high for a long time. Nonetheless, the recession may be shallow and short lived. All sectors of the US economy are already in recession with the exception of services, which however accounts for 60% of the economy.
    The downturn unfolding in the US is a textbook case. Rising interest rates first hit the housing market and the demand for durables. Then the manufacturing sector falls in recession along with profits. Falling profitability and expectations of a recession weigh on business investment (capex).
    This is exactly what has happened in the US, so far. Real residential investment has contracted for eight consecutive quarters to Mar 2023. Demand for durables fell for three quarters to Dec 2022, but rebounded in Mar. Manufacturing has been in recession for eight consecutive months to June. Business investment has dropped for four quarters in a row to Mar 2023. Corporate profits have fallen in the last two quarters at an accelerating pace.
    Services is the last citadel to fall in this chain of events. The tightness of labour market is due to the resilience of services, buttressed by the Covid-fiscal stimuli. Although many jobs in services are low paid, the service industry is labour intensive and the backbone of consumer spending.
    Slowly but surely the pace of job creation in services would slow with firms shedding labour as demand for services wanes. This is the next step in the US and Europe. The ISM for Services shows that we are at the threshold of contraction having slowed since Mar 2022. The index rebounded in June, but this is an aberration not a reversal of trend. Hence, the recession would be delayed, unfolding in 2H23 or in 1H24.
    With the US recovery delayed, the short-term prospects of the world economy are bleak. Nonetheless, US manufacturing is expected to recover much sooner (Sep onwards), spurring a recovery in China.

  3. John Mather says:

    So in the U.K. where can you find value? Interest in property stocks remaining popular among hedge funds. As real estate investment trusts (REITs) are now trading 20% to 70% below net asset value, the share prices suggest that the market expects prices to fall in the future. The main one that I follow shows a 27% discount on NAV and it may fall further in the short term as a long hold …..income is on long contracts with solid counterparts

    How do you fall off the floor?

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