A new publication for the Value for Money (VFM) framework has sparked industry concerns over upcoming changes that could lead to system gaming and high commercial risk, with calls for a delay to the official start, preceded by a two-year trial period.
At the beginning of the year Department for Work and Pensions (DWP), the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) launched a consultation to inform the details of the upcoming VFM framework that is to be introduced through the Pension Schemes Bill.
The consultation builds on feedback from last year, including measures showing expected returns and risks for savers over the next decade, alongside updated backward-looking metrics. Value for money outcomes would now be shown in four colour ratings instead of three, with the green category split into light and dark green.
Kate Smith, head of pensions at Aegon UK, said the regulator is introducing “several fundamental changes” in its latest proposals.
She warned that with so many “changes and unknowns” there is a “real risk” that rushing ahead without proper testing could produce a “flawed framework with serious adverse implications for schemes, employers and members”.
Amber or red-rated default arrangements could face closure to new employers, creating “unacceptably high commercial risks”.
Smith added that the planned central VFM database, set to launch in March 2028 and intended to report industry-wide average performance, needs testing before going live.
She said: “Attempting to use it ‘live’ in just two years’ time looks incredibly risky. Any inconsistencies or errors in submitted data or underlying calculations could undermine the whole framework.”
Andy Lewis, partner at Sackers, suggested amber arrangements should have a grace period to improve before being closed to new business.
Forward-looking investment metrics
Commentators also warned that forward-looking investment metrics risk “gaming the system” by inflating comparative scores with optimistic assumptions.
Smith said: “The original proposals were an attempt to move the pension industry away from comparisons based largely on costs and charges. Now they are clearly skewed towards investment performance – some of which will be highly subjective.”
TPT Retirement Services also flagged concerns over forward-looking metrics.
Ruari Grant, head of policy, acknowledged their potential to encourage diversified strategies but said direct comparison of metrics based on differing assumptions could be misleading, and they should have a “qualitative role in contextualisation, rather than quantitative”.
He added: “Creating composite metrics of backward and forward performance could be particularly misleading, and create a mechanism for poor performers to reduce scrutiny and accountability.”
“Creating composite metrics of backward and forward performance could be particularly misleading”
Ruari Grant at TPT Retirement Services
Anne Sander, client director and head of ZEDRA governance advisory arrangement, said aspects of the current proposals risk distorted assessments and suggested improvements.
She called for five-year forward-looking metrics, alongside one-year measures for cohorts nearing retirement, to provide a more meaningful assessment of value to members.
Sander also stressed the need for independent governance bodies to have transparency over capital market assumptions.
“This would enable effective challenge of those assumptions, better assessment of backwards-looking outcomes, and provide an additional safeguard against potential gaming,” she noted.
Despite concerns, the industry acknowledges that if “done well”, the framework could be a “force for good”.
Smith urged regulators to run a two-year trial period limited to the largest multi-employer default arrangements and single-employer trust-based schemes, with data shared only with regulators.
TISA’s response similarly highlighted potential reputational, commercial and member risks, calling for a two-year test period to ensure proper implementation.
