Value for Money: A framework on metrics, standards, and disclosures

Following a joint consultation by the Department for Work and Pensions (DWP), the Financial Conduct Authority (FCA), and The Pensions Regulator (TPR) in January 2023 on a proposed new framework for the assessment of Value For Money (VFM) across defined contribution pension schemes (DCPS), the three regulators have now published a corresponding response paper. In it, the regulators summarize the key feedback they have received to their consultation and provide their views upon this feedback.
### Background
On January 31 this year, the three regulators initiated a joint consultation on a proposed new framework to oblige managers and trustees of DCPS to assess Value For Money of their defined contribution relevant occupational pension schemes (please see EventID 19493 for a highly detailed description of the proposed framework). The key objectives of the new framework, so the regulators, are to enable pension scheme members compare different defined contribution pension schemes in terms of objective measurable benefits to scheme members, to identify pension schemes that are underperforming, and to ultimately lower the costs of pension scheme administration and management so as to increase the return on investment.
The new framework would thereby require assessments and standardized disclosures in predefined metrics as regards
– investment performance;
– costs and charges incurred to scheme members; and
– the level of customer service, scheme oversight, and scheme governance.
### Summary of responses
As expected, the DWP, FCA, and TPR received much feedback from various stakeholders, including pension fund managers, trustees, law firms, industry bodies, pension scheme members, and many others. The key issues addressed by respondents and the regulators views on such are briefly described below. For more details on the feedback, please consult the original feedback statement.
#### (1) Assessment of investment performance
Disclosure of backward-looking performance metrics: Respondents generally agreed with the use of backward-looking metrics (measuring past performance) as this is a widely accepted way to evaluate investment performance and member outcomes. This is seen as a way to hold investment strategies accountable and determine whether past decisions added value to members‘ investments. However, some respondents expressed concerns that past performance might not accurately predict future performance, which is a common disclaimer in financial services. They worry that relying solely on historical performance might not provide a complete picture of the current value of investments. Furthermore, some respondents emphasized the need for including forward-looking metrics in addition to backward-looking ones. This is especially important for pension schemes with long-term investment horizons, as it balances the evaluation of past performance with the potential for future growth, particularly when considering illiquid investments.
Net vs. gross performance: Concerning the questions of whether or not investment performance should be reported on a net or gross basis, there were differing views. Reporting net performance considers all costs and charges, while gross performance does not factor in these costs. Both options have pros and cons. Some respondents favored net reporting for transparency reasons, while others raised concerns about the data burden to derive net figures, potential double-counting of costs, and the general complexity associated with net reporting.
Return net of investment charges only: As far as the addition of a new metric concerning the disclosure of the investment returns net of investment charges and transaction costs, most respondents favored such disclosure as the metric reflects the relationship between investment returns and the charges associated with those investments. This metric is seen as significant because it directly links the returns generated by investments with the costs charged to scheme members. Additionally, respondents argued that the data for disclosure of this metric is easily available.
Use of forward-looking performance and risk metrics: Many respondents saw the value of incorporating forward-looking performance and risk metrics, recognizing their potential to support future member outcomes. Combining these metrics with backward-looking performance could provide a more holistic assessment of return expectations and strategies. Furthermore, such metrics could counterbalance the naturally backward-looking nature of VFM assessments which would allow schemes to evaluate strategies for the future rather than just relying on past performance. If any such metrics are to be used, however, most respondents stressed the need for transparency in the modeling process, acknowledging that all models are based on assumptions. Therefore, forward-looking metrics should come with warnings about their accuracy and potential risks.
Feedback from the regulators: The regulators will proceed as proposed with the above noted disclosures with one key change: they will NOT require the disclosure of investment performance on a net basis, acknowledging the issues raised by respondents.
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#### (2) Assessment of costs and charges
In their consultation, the regulators proposed to modify the existing disclosure requirement of DCPS to require the disclosure of ALL charges occurred by the pension schemes regardless of who is bearing those charges (employer or pension scheme member) – no feedback was sought on this issue. Additionally, DCPS would have to disclose the total administration costs related to their schemes on an item-by-item basis as a percentage of total assets under management..
In summary, the respondents expressed a range of opinions regarding the separation of costs. While some supported the idea for increased transparency reasons, most highlighted the complexities, practical challenges, and potential limitations of such separation in the context of various charging structures. Furthermore, many respondents argued that the costs for the separation of charges in disproportional to the benefits brought to scheme members. After all, so they argued, the total costs are relevantsch and not individuals cost items.
Feedback from the regulators: The regulators will proceed as proposed with the above noted detailed cost disclosure requirement, as they find that such disclosures are necessary for scheme members to facilitate „market-wide comparison and shine a light on how investment and service costs differ to increase focus on how different elements of cost impact on good saver outcomes“
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#### (3) Assessment of customer service and scheme oversight
In their consultation, the regulators proposed to require the disclosure of other factors that would bring benefits to scheme members, e.g. effective communication between DCPS and their customers or effective management of (financial) transactions. Proposed metrics included:
– the number of investments made by DCPS within the legal time limit following payments of scheme members;
– the number of successful and adequate transfers and / or switches between schemes or investments within the legal time limit;
– the percentage of scheme members that update their customer profile during prescribed period of time (e.g. selected retirement age, selected retirement payment, etc.); or
– the outcome of scheme member satisfaction surveys in terms of number of surveys completed and in terms of satisfaction with a limited number of standard assessment criteria.
Most respondents acknowledged the importance of incorporating communication and management metrics into the VFM framework. As far as communication metrics are concerned, many respondents believed that the proposed metrics don’t go far enough and don’t reflect modern digital offerings. They suggested considering the membership demographics and the level of employer engagement, as these factors will strongly influence the success of communication strategies. Others raised concerns about the metrics on the „percentage of scheme members that update their customer profile during prescribed period of time“, as typically, scheme members will only become involved in this issue shortly before retirement sets in.
As far as the proposed management or administration metrics are concerned, the majority of respondents supported the proposal to include such metrics, particularly in the context of standardizing disclosures. The suggested metrics were generally deemed suitable as a baseline. However, concerns were raised about the lack of comparability in performance due to differing Service Level Agreement (SLA) measurement methods across schemes.
Feedback from the regulators: The regulators note that they will proceed with the administration metrics, thereby clearly defining their expectations as regards the measurement of processing times. They will also consider aspects out of control of DCPS such as employer response times when designing the final metrics.
As far as the communication metrics are concerned, they will remove „the previously proposed requirement to disclose the percentage of members who
update/confirm their selected retirement date and how they wish to take benefits“, thereby acknowledging the feedback provided by respondents. Key focus will be on the customer satisfaction survey, which may also include ESG-related issues and may have particular questions depending upon the demographics of scheme members. Further work will be done in this area before deriving final metrics.
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#### (4) Other issues as regards publications of the disclosures
As far as other issues around the publication of the disclosures are concerned – such as the publication „location“, publication time, reporting periods, and frequency of publication – the regulators concluded the following based upon the feedback provided:
– at the beginning, there will be a decentralised approach to making disclosures, meaning that schemes can choose the „location“ where they make these disclosures along prescribed templates for consistent reporting; and
– disclosures shall be made annually in the first quarter of each reporting year.
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#### (5) The final VFM assessment and the way forward
To conclude, the regulators finally highlight the feedback and their views on such as regards the actual performance of the VFM assessments. To recall, the FCA, DWP, and the TPR proposed to require the assessment of
– the overall scheme performance including, among other things, the assessment of performance relative to other schemes or industry benchmarks;
– the effectiveness of the investment strategy of a scheme, e.g. by comparing the above noted returns net of investment charges to other schemes or benchmarks; and
– the value of customer service again against expected values or industry benchmarks.
Having considered the feedback received by respondents which may be found starting page 50, the regulators state that at the beginning, they will require the assessment against other schemes versus an assessment against other (industry) benchmarks. In this context, they will define clear criteria for comparison and issue guidance for the assessment process so as to ensure comparable results. However, the regulators also note that they may require the assessment of VFM against industry benchmarks at a later point in time or may alter the VFM process based upon initial experience, once the new framework will be effective.
The final VFM will be implemented in phases to allow DCPS sufficient time to adjust their assessment, compliance, and reporting processes accordingly. As many of the VFM framework proposals will require primary legislation changes, the DWP will soon launch consultations on draft regulations. Likewise, the FCA will launch consultations on proposed rules to transpose the new VFM framework.