Pension industry warns UK’s Value for Money framework could drive investment herding

Pension industry responses to the UK government’s Value for Money (VfM) consultation have called for greater emphasis on realised member outcomes, robust data and a cautious implementation to avoid unintended consequences for investment strategies and consolidation.

The Department for Work and Pensions (DWP) consultation, which closed yesterday, sets out proposals for a VfM framework covering investment performance, costs and charges, and service quality.

Under the proposed phased rollout, master trusts, large single-employer trusts with 50,000 or more members, and all firm-designed open multi-employer contract-based pension funds would undergo full VfM assessments and receive ratings in 2028.

Smaller single-employer trusts, legacy arrangements and bespoke schemes would initially submit data to regulators without public reporting. From 2029, all in-scope schemes would be subject to full disclosure, assessment and ratings, alongside associated consequences.

A common concern among respondents is that comparisons should not encourage schemes to converge on similar investment strategies or create a performance league table.

LCP said comparator groups should reflect target retirement outcomes rather than encourage “league table behaviour, herding or inappropriate like-for-like comparisons”, while Hymans Robertson warned that greater transparency could unintentionally encourage schemes to adopt similar investment approaches.

Anthony Ellis, head of defined contribution (DC) trustee consulting at Hymans Robertson, said: “As the DWP Value for Money consultation closes, we welcome the continued focus from government, the [Financial Conduct Authority] FCA and [the Pensions Regulator] TPR on improving member outcomes and creating a more consistent framework for assessing value in DC pensions.

“A stronger focus on long-term investment performance has the potential to improve decision-making and help drive higher standards across the market. However, the design of the framework will be critical,” Ellis noted. “There is a fine balance, which the DWP must tread between increasing transparency and creating incentives that unintentionally encourage schemes to converge on similar investment approaches. This must be offset with innovation alongside a spectrum of strategies available to members.”

LCP also called for every scheme to have at least one full assessment year before formal consequences are attached to VfM ratings. It said intervention following a poor assessment should be demonstrably in members’ interests rather than assuming that a transfer or intervention would automatically improve outcomes.

Stephen Budge, partner in LCP’s DC team, said: “The revised Value for Money framework has the potential to improve outcomes, but there is a real risk that an overly narrow assessment becomes a distracting regulatory exercise rather than something that genuinely helps employers and trustees improve value for members.

“For engaged schemes, good governance already involves looking well beyond investment performance and charges to consider administration, communications, retirement support and the wider member experience. The framework needs to recognise that broader picture, as well as the value of employer support, if it is to drive better decisions rather than unintended consequences.”

Cost is fundamental

ClearGlass, however, argued that cost remains a fundamental component of value for money, based on its mandate-level cost and performance data.

Tim Brown, CEO of ClearGlass Analytics, told IPE: “The mandate-level cost and performance data that ClearGlass has seen over many years has confirmed that costs are the most important driver of value because improved terms deliver better outcomes for scheme members immediately, and not just once, but indefinitely. And these improvements compound over time enhancing value further.”

He added: “The data has also shown consistently wide disparities in costs not only between different asset managers for very similar solutions at similar scale, but also between different clients of the same manager for the same solution.”

Brown noted that performance “is obviously also important but, unlike cost, is rarely enduring”. He continued: “Costs are something that trustees can always control in terms of value for money. Schemes should be open to accepting higher fees linked to strong performance. In this context, removing the charge cap for DC schemes makes sense and opens up the range of investments that schemes can make but costs are still key to delivering value for money.”

Objective and proportionate

Other responses similarly called for the framework to be objective and proportionate. TPT Retirement Solutions said assessments should be based primarily on realised member outcomes, with forward-looking projections unable to dilute accountability for poor historical performance. It also called for independent assessment or, at minimum, stronger regulatory scrutiny of schemes’ assessments.

The Independent Governance Group said service quality should go beyond basic administration measures to include member understanding, communications, digital journeys and targeted support. The Society of Pension Professionals also warned against a one-size-fits-all approach and said historic performance should carry greater weight than forward-looking metrics.

Standard Life backed a genuine first-year “dry run” to test data and methodology before ratings are made public. People’s Partnership similarly called for government, regulators and industry to work at pace to provide the technical and regulatory certainty schemes need to implement the framework.

Patrick Heath-Lay, CEO of People’s Partnership, said: “The Value for Money framework will bring the change the pensions industry needs and will support delivery of better outcomes for millions of savers – but we don’t have long to ensure it does. There is a lot of work to do to give schemes the clarity they need to build, test, and implement the changes in time. The only viable approach is for government, regulators, and industry to work in genuine partnership and at pace.

“This is vital not only to ensure the VfM framework can get off the ground as intended, but also to realise the government’s plans around productive investment,” Heath-Lay continued.

“If we want pension schemes to play a greater role in driving the UK economy through long-term investment – and we do – they need the confidence to make those investment decisions with a clear understanding of how they will be assessed. Getting that clarity in place quickly will be crucial.”