VFM – Getting the Ball Rolling

Since the Value For Money (VFM) consultation response was jointly issued by the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) back in July, it’s been all quiet with regards to what happens next. Whilst there’ll be a further consultation on draft regulations and Financial Conduct Authority (FCA) rules for detailed requirements, there are currently no timelines for policy and implementation. The consultation response gave a good indication of the likely direction of travel. It also responded to concerns about excessive data requirements and has amended and clarified various points as a result. So lets consider what we know at this point and what early preparation can be started.

This is likely to be a long, slow burn. The framework will be implemented in phases, starting with a smaller, simpler dataset and gradually building it out, possibly over several years. ‘It will take time to fully implement the framework and we want to ensure that it is effective and proportionate.’¹

Whilst it could be viewed as a further burden on providers, the VFM framework will seek to achieve (amongst other things):

• Re-focus from cost to value
• Eventual replacement of the annual Defined Contribution (DC) Chair’s Statement and Value for Members assessment
• A consistent standard to allow comparison between schemes
• Increased competition
• Implementation of industry league tables of red/amber/green VFM ratings
• Coverage of 3 key elements:

                                                          1. Investment Performance

                                                          2. Costs & Charges

                                                          3. Quality of Services

Outputs will initially be aimed at pension professional’s (rather than directly at pension savers), to help trustees make informed decisions, and employers to compare value and performance when choosing a scheme.

When the requirements come into play, it will impact schemes from an operational and reporting perspective. Therefore, it makes sense for schemes and asset managers to start considering what data they will need to provide and where their gaps are. The metrics that need to be reported can be split into categories of a) mandatory; b) to be reported if readily available; and c) can be reported optionally to provide additional context.

1. Investment Performance

Good news! The original plan of providing investment performance data net of costs and charges has been scrapped. This would have been more difficult to achieve, requiring collection of large amounts of data, especially for multi-employer schemes. Instead, backward-looking investment gross performance data will need to be provided for 1, 3 and 5 years, plus 10 & 15 years if available.

As per the existing Chair’s Statement requirement, it will be mandatory to disclose the percentage of assets allocated to the eight main asset classes. Providers will also be encouraged to disclose more granular sub-asset classes too, but this won’t be mandated.

The above Performance and Asset Allocation metrics will be grouped into cohorts to represent the growth phase, de-risking and at retirement. Based on feedback, this will be based on years to retirement from scheme’s default retirement date. Policymakers will consider what period these cohorts should be based on e.g., 25 years to retirement for the growth phase, 5 years to retirement for de-risking and the schemes’ default retirement date for ‘at retirement’.

I suspect the provision of the forward-looking expected performance metric will be more challenging. This metric would be based on modelling and assumptions, much like Annual Benefit Statement (ABS) projections are. Therefore, there have been calls for it to be accompanied with a clear explanation plus warnings of accuracy and expected risks. The joint departments have indicated their intention to work with the Government Actuary’s Department (GAD) and industry to determine a feasible approach for this metric, due to its complexity. The template will also allow for publishing the corresponding assumed future asset allocation basis, which may differ from the current/past asset allocation.

An interesting by-product of the above, over time, the combination of backward and forward-looking performance metrics will allow schemes to show actual performance against past projected performance. This could allow Regulators to intervene when forward-looking metrics are consistently not in line with actual performance, and hold providers to account i.e., exposing ‘over-promising’.

2. Costs & Charges

Providers will need to provide service costs and investment charges. Again, this data will need to be grouped into the growth, de-risking and at retirement phases. It will be mandatory to provide for the most recent year, with data for 3, 5, 10 & 15 years to be provided if readily available.

3. Quality of Services

Scrutinising the end-to-end process. This is also likely to be more challenging due to the more qualitative aspects it covers. However, the plan is to provide quantitative metrics on areas such as member complaints, member communication, and scheme administration e.g., time to complete transfers between schemes.

Reporting & Disclosure

The first publication of the assimilated data will need to cover the calendar year and be published by the end of Q1 the following year using a prescribed template to facilitate consistent reporting. The actual assessment of VFM including a resultant RAG rating will then need to be made using this data and comparing against other schemes. How this is to be done is not yet clear, but a process and guidance for how it should be undertaken is expected to be provided. Clearly this is an area where new processes and procedures will need to be documented.

The second publication of the resulting VFM Assessment Report will need to be published by the end of October each year and should be communicated to all employers in the arrangement. This is where the critical point kicks in for schemes that are underperforming, as additional information must be provided regarding steps being taken to improve VFM or transfer/wind-up in the savers’ best financial interests.

Things to consider:

• Is the data required for VFM assessment already available?
• If not, will you need to start collecting/storing additional data or requesting it from an external party e.g., Asset Manager?
• Are the existing calculated metrics sufficient/compliant with what’s required for VFM, or will they need to be adjusted?
• How will you implement the prescribed data reporting templates?
• How will you assess the results to determine VFM?
• How much will it cost and how long will it take to be ready?

Conclusion:

Whilst the timescales are unknown at this point, it’s clear that schemes will need to establish supporting processes and procedures to produce the required metrics, undertake the VFM assessment and publish the results, including communications to employers of schemes. The consultation response has provided clarity to enable early preparation to take place, and I would suggest an early focus on data requirements would be a good place to start. Most schemes will have the majority of the data required for the initial disclosures as it’s already used for other purposes, but it’s worth understanding where your gaps are and how you’re going to fill them. Definitely one to watch for providers, trustees, third party administrators and asset managers alike.

So, you’ve got your VFM assessment – then what? In our next instalment, Jayne Brown will consider what the VFM assessment will be used for and whether it’s likely to achieve the intended outcomes.

References:

• Allen Overy. (2023). Pensions: what’s new this week – 17 July 2023. Available at: Pensions: what’s new this week – 17 July 2023
• UK. (2023). Consultation outcome:
• Value for Money: A framework on metrics, standards, and disclosures. Available at: Value for Money: A framework on metrics, standards, and disclosures – GOV.UK (www.gov.uk) (Accesses 01/10/2023)”
• Jack Gray. (2023). DWP and regulators outline plans for VFM framework implementation. Available at: DWP and regulators outline plans for VFM framework implementation – Pensions Age Magazine (Accesses 31/07/2023)