Value for Money: Better Retirement Outcomes and Greater Transparency – Further Consultation on New Framework for DC Pension Schemes | Mayer Brown

The Monetary Conduct Authority (FCA) and the Pensions Regulator (TPR) are consulting further on the new value for money (VFM) framework for DC pension schemes. The session is meant to function:

• The FCA’s response to its 2024 session on the proposed detailed guidelines and steerage for contract-based schemes (to be set out within the FCA Handbook);
• An additional session on amendments to these guidelines and steerage in gentle of the suggestions to the 2024 session; and
• A dialogue paper, inviting enter which can be utilized in growing the laws that may set out the VFM necessities for trust-based schemes. The intention is that the brand new framework shall be constant throughout contract-based and trust-based schemes.

The New Framework

The brand new framework will apply to default preparations in DC schemes which are getting used for automated enrolment and that meet prescribed standards. This contains default preparations in DC sections of hybrid schemes the place the DC part is getting used for automated enrolment. The place a scheme has multiple default association, the framework will apply individually to every default association.

The brand new framework will comprise 4 parts:

1. Measurement: Schemes shall be required to measure and publicly disclose their default association’s funding efficiency, prices and costs, and repair high quality utilizing prescribed metrics. They may even be required to make prescribed asset allocation disclosures;
2. Comparability: Schemes shall be required to match their default association’s efficiency in opposition to the market on a constant, goal foundation. They’ll then must assign a crimson/amber/inexperienced (RAG) score to their default association indicating the extent of VFM that it delivers;
3. Disclosure: Schemes shall be required to publicly disclose their default association’s RAG score, along with prescribed data on funding returns and an evidence as to why that score has been assigned. For trust-based schemes, TPR intends this data to be included in a standalone evaluation report, quite than within the chair’s annual governance assertion; and
4. Motion on Poor Worth: The place a default association is assigned a crimson or amber score, the scheme should take sure prescribed actions. Relying on the particular VFM score achieved, these embrace notifying the FCA/TPR and employers, closing the association to new employers, submitting motion and enchancment plans, and transferring members to an association which presents higher VFM. Particulars of the deliberate actions have to be included within the scheme’s evaluation report.

Proposed Modifications

The important thing adjustments proposed embrace:

• Introduction of forward-looking funding metrics along with backward-looking funding metrics;
• A discount within the variety of backward-looking funding efficiency metrics and prices metrics;
• Removing of engagement-related metrics from the service high quality metrics to permit additional trade engagement on growth of these metrics;
• Comparisons of worth in opposition to a industrial market comparator group quite than three different schemes. This may be enabled by a central VFM database into which all scheme VFM information can be entered for the needs of comparability and doubtlessly publication;
• Discount of the VFM evaluation course of from 4 steps to a few steps; and
• A four-point RAG score system (instead of the three-point system initially proposed). The 4 scores shall be:
  • Darkish inexperienced: The default association is outperforming most within the comparator group and there are minimal areas the place enhancements may very well be made;
  • Mild inexperienced: The default association is delivering VFM, however there are areas that might/must be improved;
  • Amber: The default association isn’t delivering VFM, however the scheme believes enhancements are potential inside three years to ship VFM; and
  • Purple: The default association isn’t delivering VFM and can’t be improved to ship VFM inside three years.

Timings and Subsequent Steps

Precise implementation is a while away, however superior preparation goes to be useful for schemes.

The session closes on 8 March 2026. The Pension Schemes Invoice presently going by way of Parliament contains provisions to allow the mandatory laws to be made for trust-based schemes. As soon as the Invoice has obtained Royal Assent, the federal government will seek the advice of on draft laws and TPR will seek the advice of on any crucial codes of observe or steerage.

The intention is the brand new framework will come into drive on the similar time for each contract-based and trust-based schemes. Topic to the completion of the parliamentary course of for the laws for trust-based schemes, the present expectation is the primary assessments underneath the brand new framework shall be required in 2028.

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