Regulator proposals to assess the value of workplace pensions risk missing the nuances in value that different employers and members get from each scheme, consultants have warned in response to the Financial Conduct Authority’s (FCA) proposals for its Value for Money Framework (VfMF).
The aim of the FCA’s VfMF is to reduce the number of savers with defined contribution pensions that deliver poor value and encourage better value for money across the workplace DC market.
Consultants at Broadstone said the proposed one-size fits all approach could miss the nuances that make them valuable to their members.
For example, small employers may prefer consistent and high-quality pension providers, while, larger organisations typically prefer more bespoke provider services, such as a greater range of investment products and communication strategies.
Vanilla arrangements
It said that any ‘like with like’ comparison should avoid scrutinising more ‘vanilla’ pension arrangements for not reaching standards they have not needed or promised to meet.
Consultants raised major concerns about the ‘Red, Amber, Green’ (RAG) rating proposals that the FCA plans to use.
It said that while simplicity and engagement is critical, the RAG system is “so reductionist that it risks draconian outcomes for those falling under the amber rating”.
There is also a lack of focus on the ‘decumulation stage’, which are key for member outcomes at retirement.
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 VfMF for savers in later life.
“It’s critical that any framework preserves the nuances that make different schemes valuable to their members, rather than penalising them for not conforming to a standard they were never intended to meet.”
