Broadstone, a leading independent financial services consultancy, has responded to the Financial Conduct Authority’s (FCA) proposals for its Value for Money Framework for defined contribution schemes.
The intention of the FCA’s Value for Money Framework is to reduce the number of savers with workplace personal pensions that are delivering poor value, and drive better value for money across the workplace DC market through greater scrutiny and competition on long-term value rather than predominantly cost.
Broadstone welcomes the Government’s intention in harmonising the measurement of value for money across a variety of DC schemes, and for savers to be indifferent to the specific scheme type that may be saving in, focusing instead on outcomes.
However, Broadstone believes the framework should also not lose sight of how different schemes fit with different types of members and employers. For example, small employers may prefer, consistent and high-quality pension providers, whereas, larger organisations typically prefer more bespoke provider services, such as a greater range of investment products and communication strategies.
Therefore, a ‘like with like’ comparison between different schemes must not scrutinise more ‘vanilla’ pension arrangements for not reaching standards they have not needed to or promised to meet.
On the subject of different schemes, the framework should also recognise the value that single-employer trust-based schemes bring via their close relationship with their provider. This benefit includes greater scope for bespoke communications, stronger relationships with members and higher standard of data quality and trustee fiduciary duty.
With regards to the ‘Red, Amber, Green’ (RAG) rating proposals, Broadstone raises some considerable concerns.
While simplicity and engagement is critical, the RAG system is so reductionist that it risks draconian outcomes for those falling under the amber rating. Moreover, it could lead to reputational damage and league tables based on RAG ratings which may not reflect the true nuances of pension provision.
The proposal also fails to address the decumulation stage, instead focusing heavily on the accumulation stage with little reference to member outcomes at retirement. This essential stage of a saver’s pension journey is well-understood by regulators in mature DC markets to be a crucial component of member outcomes and should not be overlooked by this framework.
Broadstone would also like to see some thought given to how ‘retail’ arrangements can be captured in the framework, in order to support those with individuals who have funds in legacy arrangements and the thousands of people who do not rely on employer sponsored schemes.
David Brooks, Head of Policy at Broadstone, said: “We welcome the consultation and fully support the FCA’s efforts to create a consistent, transparent measure of value for money across all colours and stripes of defined contribution schemes. It’s a crucial step towards enhancing member engagement and improving long-term outcomes for savers.
“However, while standardised and clear-cut performance metrics are essential, it’s equally important that the framework recognises the unique characteristics of different pension arrangements. A one-size-fits-all approach risks overlooking the individual strengths of various schemes, especially those offering tailored services to specific employers or members.
“The proposed ‘Red, Amber, Green’ (RAG) rating system, in its current form, may unintentionally subject high-performing schemes to unfair scrutiny, meanwhile, a heavy focus on accumulation risks long-term VfM for savers in later life.
“It’s critical that any framework preserves the nuances that make different schemes valuable to their members, rather t
