On Wednesday night , the FCA published a press release on how it intended to adopt the VFM framework so that contract based schemes are tested for VFM as occupational schemes. Unlike TPR, the FCA can make the law and this is the next step in them doing so.
You can download it from here or read it from the blog (yes – a lot of pages)
When the Pension Schemes Bill is enacted, we can expect the FCA to put the measures in this consultation into law, meaning that we will see joined up governance. Contract based schemes will be measured in the same way as occupational schemes. The agents may be different but the impact will be the same.
The FCA tells us the Framework introduces 4 elements. It:
• requires the consistent measurement and public disclosure of investment performance, costs, and service quality by firms for all such arrangements against metrics the FCA believes will allow VFM to be assessed effectively
• enables those overseeing and challenging an arrangement’s value – IGCs and Governance Advisory Arrangements (GAAs) for contract-based schemes – to assess performance against other arrangements and requires them to do so on a
consistent and objective basis• requires public disclosure of assessment outcomes including a Red Amber Green (RAG) VFM rating for each arrangement
• requires firms to take specified actions where an arrangement has been assessed as not VFM (Red or Amber)
The agents for assessment are not the providers themselves but arms length fiduciaries known as Independent Governance Committees (IGCs) and for smaller providers Governance Advisory Arrangements (GAAs).
For many years I have been monitoring the IGC and GAA reports and bemoaning the lack of consistency in the ways that VFM is measured. Let me give some examples to explain why a top-down intervention was needed
I apologise to you , cherished readers for what follows; believe you me there is no easy way to explain the mess that IGCs and GAAs got themselves into over VFM. Here are just a sample of the many VFM reports I have had to study over the past nine years.
I hope you feel my pain!
Trying to make sense of all these different ways of measuring value for money was well nigh impossible. The value to the consumer was extremely small and because there was no sanction for not achieving value for money, providers took these assessments with a pinch of salt. I have never seen contrition from a provider for any failure detected by a GAA or IGC. Other on these blogs, there has been no attempt to publish which providers have consistently failed or succeeded in providing VFM.
Thanks to Vanguard who have already sent their 2023/4 Chair’s report, I will over the next few weeks publish my assessment of this year’s batch. It may be the last time I do it, I hope that if VFM as a concept is embraced on a consistent basis, the results of the IGC and GAA reports will be published by the FCA (as they always should have been).
There is nothing controversial about the RAG system, nor the concept of closing poor performing GPPs down as workplace pensions. It will be intriguing to see what happens when poor GPPs with very low negotiated charges are challenged.
In my view, the low charges are transferrable between providers and between GPP and master trust, performance is not transferable – nor quality of service. In short a pig with low charges is still a pig.
This existential threat to providers means that contract based workplace pension providers must build into their business plans the risk that the future of its arrangement is dependent on it continuing to deliver value for money as determined by an independent arbiter.
The FCA leaves workplace pension providers in no doubt that the threat of closure
We expect initially to see a proportion of arrangements rated amber or red and therefore have poor value addressed.
Consistent failure to address poor performance will lead , as it does in Australia, to the closure of a GPP, Stakeholder pension or GSIPP from taking future contributions.
So employers who had previously boasted that a workplace pensions was superior for its negotiated costs and charges, may needs be embarrassed to tell staff that its scheme is failing and that (perforce) contributions will need be directed to another workplace pension in future.
Where the charges of a GPP are so low that the scheme can only improve its VFM by investing in better defaults and better service , the cost of a workplace pension may have to increase. This is unlikely to be acceptable to employers. The cut-throat practices that have driven price down and performance and service with it, may come back to bite providers in terms of persistency. The only justification for such low pricing as we have seen in the early years of the last decade is the “stickiness” of the arrangement. Stickiness or persistency was assumed by the quality of the sponsor covenant and the inertia of employers to change providers. The latter assumption is now likely to be challenged.
A word about the future…
The consultation is clear what is not in scope but can be expected to be addressed
“The metrics and concepts of the Framework can also be relevant to non-workplace
pensions and even decumulation solutions. Extending the Framework beyond workplace
pensions could help ensure that any pension product offers fair value, consistent with
the Consumer Duty but across trust-based as well as contract-based pension schemes.
For FCA-regulated firms, the availability of consistent public data for comparison helps
them meet their obligations under the Duty. However, beyond workplace pension
default arrangements (and over time for these too) we would also expect much greater
consumer use of VFM assessments. We would want to consider how best to adapt the
Framework requirements to meet their needs.”
This consultation is about a framework that addresses savings but not savers, “workplace pensions” but not “pensions” and employer funded arrangements not those of the self-employed and those who transfer out of occupational schemes.
It is imperfect but it is a start. At 120 pages it is a major initiative of the FCA’s which has been developed in lockstep with DWP and FCA. It is clear that, as with the Consumer Duty of which VFM is a part, the FCA is in deadly earnest.
After nearly 10 years of exploring the value of IGCs and GAAs, the FCA has finally found a proper use for them.