FCA hones in on value for money as new rules come into force

The Financial Conduct Authority (FCA) has published a policy statement on new rules, which come into force from today (4 October 2021), for assessing value for money (VFM) in workplace pension schemes and pathway investments.

The rules will require Independent Governance Committees (IGCs) to assess and report on VFM, particularly through comparison with other market options, taking account of three key elements: costs and charges, investment performance, and services provided.

They will also be required to consider, as far as they are able to, whether an alternative scheme or schemes would offer better VFM and inform the pension provider or the pathway investment provider if so.

Under the requirements, firms and IGCs have until the end of September to publish their next report.

The changes aim to better equip IGCs to make informed challenges to providers and to promote greater transparency in order to help employers, advisers and employees bring competitive pressures on providers to provide VFM.

The FCA first consulted on the requirement in February 2019 and, following an industry consultation, confirmed final rules in February 2020, which included diluted plans for pension schemes to provide fee information on all funds, in response to concerns over the implementation process.

The regulator also provided further clarification on its expectations on requirements for workplace personal pension scheme providers to publish costs and charges data in June 2021.

Commenting on the policy statement, AJ Bell head of retirement policy, Tom Selby, said that the three VFM concepts outlined by the regulator are the "right ones", noting that key considerations like environmental, social and governance factors are also "likely to be captured within these".

He continued: “Automatic enrolment is the primary context for this renewed focus, with millions of people thrust into retirement saving for the first time and the majority contributing through inertia rather than by making an active choice.

“It is therefore crucial policymakers are firmly focused on ensuring these members continue to receive value-for-money from their scheme. While the 0.75 per cent charge cap is an essential protection, increasing scale should mean providers costs drop significantly over time.

“As this happens, it is vital the benefits should be passed directly to savers rather than being swallowed up elsewhere, as we know even small differences in costs and charges can add tens of thousands of pounds to your final retirement pot."

Selby also warned, however, that there is a "danger" that the desire from the government and regulators to drive investments into illiquid assets and boost the UK economy could divert attention from ensuring more investors benefit from lower charges.

“Indeed, a recent Productive Finance Group Working Group report suggested there had been ‘excessive’ focus on costs and charges in workplace DC pensions. This feels at odds with the direction of policy in the last decade and risks leading to hubris in the market," he continued.

“Ultimately costs and contributions are the two key elements retirement savers have total control over, and therefore ensuring costs are as low as possible must remain a priority.”

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