Value for money framework

Patrick Coyne, Interim Director of Policy and Public Affairs at TPR, and Nike Trost, Head of Asset Management and Pensions Policy at FCA, discuss the evolving value for money framework. Hear how it's shaping up, why it matters and the positive impact its set to have across the industry once rolled out.

Transcript

Dan M

Hello, and welcome to the latest instalment of TPR talks. I'm Dan Menhinnitt, media officer at TPR. And in this episode, we'll be taking a closer look at the upcoming value for money framework. This initiative is a joint venture between TPR, the Financial Conduct Authority, and the Department for Work and Pensions to help me unpick some of the details.

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Unknown

I'm lucky enough to have two guests with me

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Unknown

Nike Trost, who heads up asset management and pensions policy at the FCA. Hi, Nike.

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Unknown

Hi there. And thank you very much for inviting me to our podcast.

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Unknown

You're very welcome. And Patrick Coyne, who heads up policy and public affairs at TPR. Hi, Patrick.

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Unknown

Hi, Dan. Yeah, this is really regulators working together in action.

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Unknown

So my first question I'll start with unique.

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Unknown

The value for money framework is being jointly developed by TPR, FCA and DWP. And it's going to require all relevant schemes to disclose clear and comparable data on investment performance, costs and charges, and service quality.

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Unknown

Nick, can you remind our audience of why the framework and value for money information being available helps savers?

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Unknown

So the benefit of the framework is really about transparency and that transparency then driving better decision making without having that kind of information is not possible to fully compare the performance of different schemes. Better transparency should enable decision makers like employers, trustees, others, to really think through whether investment return is generated in the right way. Was this scheme overall performs in the interest of members in the long term, and it should drive better competition to allow people to not just compete on immediate cost, but really think about long term value.

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Unknown

So transparency really seems to be the guiding motive behind this, because we feel that it's going to help both savers and trustees make better decisions.

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Unknown

Patrick, the government's action plan that was recently published talks about regulation to support growth and some of the pledges that TPR have made to encourage growth, involve consolidation and consideration of investment in productive assets.

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Unknown

How will the VSM framework help deliver this?

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Unknown

Yeah. I think, you know, the role that pensions play in generating growth is is clear. If you think about what it is that we're here to do, which is to make sure that people have enough retirement income to support them and all the life. And then when you think about it in that way, it's self-evident that savers benefit from, a strong economy.

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Unknown

And so for us, it's about making sure that there are no unnecessary barriers there. But I do think it's really important to say that as a regulator, we aren't advocating for one asset class over another. But what we are saying is that it is right, entirely right, that all schemes should be able to consider investment in asset classes that could benefit savers.

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Unknown

And actually, the best way to do that is, I guess, high standards of trusteeship scale, but also that there is clear, consistent and transparent data on performance that enables that good decision making. And that's really important in DC because we have an inertia built system. And that's been amazingly successful. You know, when I was a twinkle in the Turner commissioners eyes, who could have predicted that we'd already have 11 million more people automatically enrolled, but if 97% of them are staying in the default, it's our job as an industry to make sure they really get value.

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Unknown

And I think that that's where the value for money framework and disclosure more generally

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Unknown

is really going to help because it focus minds on what matters for savers and then starts to clarify the link between asset performance. Asset allocation, sorry, and performance.

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Unknown

So you mentioned disclosure that and we already have some disclosure around value already. So there were some, regulations that were brought in in 2021.

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Unknown

Related to the more detailed value for member assessments. What's the difference going to be between the regulations we already have and the eventual value for money framework?

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Unknown

Sure. Yeah. I mean, I'd start by saying we're still working with government and industry to clarify the final shape of the framework, but I'd say that in any future shape, it's it's going to be a continuation of that approach to value for money as a guiding light through the DC system.

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Unknown

And, with our value for members, regulations and the trust trust side of the market. We are small schemes with assets under management of less than 100 million to carry out a detailed assessment. And in doing so, we want to really check that they can compete with what's offered with by the biggest master trusts. And I think we've been pretty clear as a regulator why we support scale.

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Unknown

Our surveys tend to show it correlates pretty strongly with good governance practices. And government research suggests it could enable investment in a broader range of asset classes. But that doesn't mean you can't be a good small scheme. And for example, we know, there are lots of schemes that have valuable arrangements like guaranteed annuity rates, which means actually what they offer to savers is, is really worth it.

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Unknown

And so it's our job as a regulator to just go and check that's really the case, to make sure that those trustees have a focus on value and that they're doing the right things for their members. And and if not, then they either improve or they consolidate. And we've been doing that through regulatory initiative. And actually, you know, we found examples where people and trustees haven't bothered to comply, and we promptly find them, and, and actually we've also found trustees that have held their hands up and said, actually, I don't offer value.

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Unknown

And I think that's really positive for savers.

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Unknown

And what would you expect those schemes that make the conclusion that they don't offer value to do?

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Unknown

Well? I think I'd want them to to look across the market and to say, okay, what's right for my members and then to consolidate into into an offer that is right for that.

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Unknown

But this is an also just about regulating industry.

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Unknown

We also want industry's views, don't we? And that's why industry's views for the eventual, framework itself. And that's why I know the FCA went out recently with its consultation asking industry both contract based schemes and trust based schemes, what they thought was needed to make what is really a very big project work in practice. Nick can you give me a summary of some of the main takeaways from the 2024 consultation?

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Unknown

Which focused on contract based schemes but also had input from the trust based ones too?

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Unknown

Yeah. Let me start by saying I think DWP, TPR, we, we are all very clear that the ultimate framework has to be a framework across the whole sector. You know, for consumers, there shouldn't be a difference in what they experience, whether it's in a trust based in contract based schemes.

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Unknown

And when it comes to, comparison, actually, if you don't have metrics, you can't really compare across the market.

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Unknown

It's been great to have to, to undertake this project together. In terms of the 2024 consultation, that was really an opportunity for us to seek feedback on really detail, granular, methods of calculating investment returns, costs, other metrics.

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Unknown

Well, I'm sure we'll come on to those in bit more detail later. But to give industry to give trustees an opportunity to engage with that level of detail well in advance of any legislation that DWP might pass in due course, because we know that this is a really big undertaking, right? Implementing this will be expensive. We have to get it right.

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Unknown

It has to drive the right behaviors. Importantly, and that's maybe a neat segway into some of the early feedback we got. So we

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Unknown

certainly got some feedback around, including forward looking metrics or making some room for forward looking metrics that people can showcase when they have made changes to their scheme and what that might do. We had feedback

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Unknown

around making sure that we, stripped back some of the metrics to really make the overall framework proportionate.

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Unknown

That's something we always expected, and are certainly keen to do. And then we also had feedback on the assessment process, how that whether that really reflects, what, but that really reflects how, trustees, and others might think about schemes and refining that.

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Unknown

And overall has the top level, the high level response from contract based schemes about this initiative have been positive.

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Unknown

Had they seen the need and do they want a value for money framework?

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Unknown

I think there's a lot of consensus that in principle this is needed, that there needs to be best transparency, that there needs to be, a greater focus on value. I think that that element has been, really supported by the market. You know, people worry that there's too much focus on immediate cost and not enough focus on value words.

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Unknown

And more challenging is actually defining the specific metrics. And that's something we are still working through with industry. We've had really good engagement, will hopefully continue to have really good engagement, but we will also need to land on on some decisions in the coming months because, you know, ultimately, no, nothing makes absolutely perfect. We will have to come to there, have to reach some compromise positions.

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Unknown

So the devil may well be in the detail. Patrick, what have trust based schemes been telling you about what they've seen so far? That's been coming from both regulators.

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Unknown

Yeah. I mean, it just as I, I completely agree with Nick there. I think that generally we have a lot of warm words around value for money. And I think that's because most people that work and pensions really want to do the best they can for savers.

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Unknown

But when it gets into the detail, it's really, really hard to bring people together. And, you know, we've got to get past that. If we're going to implement a framework that really delivers better outcomes for savers and we're we're genuinely listening. We know that introducing a framework isn't easy. We know it's not easy because we've looked at other countries.

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Unknown

And so it's important that we work together iteratively to get this right. And that that joint working is across both ourselves and the FCA and DWP, but also really listening to the market. And I'm really pleased that so many trust based schemes responded thoughtfully to the consultation. As Nick said, you know, across the regulators, we've got to be in lockstep here.

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Unknown

And the fact that so many of you responded is really welcome.

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Unknown

The fact that you've said that how how strongly you're trying to listen to industry, both of you, suggests that the eventual framework is going to be shaped in some large part by industry's views and their expertise and understanding of what's happening out there in the market, rather than this being something that's just being dictated to them without sort of referencing what they feel is important as well.

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Unknown

Absolutely. Because, you know, ultimately this has to be an enabling framework that enables decision makers to make better

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Unknown

investment choices, to generate better value in the long term for members. That's a whole purpose behind it. So it's absolutely important that the ultimate metrics, that decision useful.

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Unknown

Yeah, I agree completely. And also, I mean, it would be really terrible policymaking for us to sit in an ivory tower and to say this is the answer to really complex problem.

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Unknown

I just don't think that's how regulation works. We need to set out what we want to achieve, the outcomes that we believe savers need to get from really effective system. And then really lessons industry's view about how we get there.

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Unknown

Okay. So we've had feedback and we've listened to that feedback. But Nick, what are the next steps that will allow industry to continue to feed in.

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Unknown

So I think we will expect that we will undertake some further consultation. Just to play back what we've heard and to to showcase refinements. And then, of course, we also expect that we will legislate. And Patrick, you might want to come on to that, but some of that is to enable you at TPR to to follow through on some of these initiatives.

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Unknown

Isn't it?

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Unknown

That's right. And we're not. Yeah. That making body. So Patrick, would you explain why we need legislation.

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Unknown

Yeah. That's right. So, we enact the government's policy intent and we rely on, government and DWP, enacting, first primary legislation and then secondary legislation on our behalf. And that's really shows fundamentally why it's important that we work both with DWP and with the FCA to get this right, because as Nico said from the outset, you know this, this won't work unless it works across both sides of the market.

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Unknown

And we mentioned earlier that there's a lot of detail. One of the things that has been discussed is this idea of a red, amber green rating. Can you talk to me, Patrick, about how you think that could look? I mean, we understand that industry has been concerned about this being potentially too binary. What kind of reassurance that you could you give them?

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Unknown

Yeah, I guess the assessment is where the rubber really hits the road. Do I offer value or not? And what schemes have told us is that there is a massive impact of being classed as green or amber, and that rating yourself as amber, even if it was the right thing to do, might have commercial consequences. Some of the things that they highlighted were, for example, stopping new business opportunities, which in and of itself would prevent you moving to green.

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Unknown

And I don't think that's the intention. Right. It's not an intention to prevent schemes getting better. And so we're really looking hard at how we strike the balance that

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Unknown

and the value for money framework is going to involve ultimately quite a lot of data. How do we see that data collection, those data solutions coming into place is it's going to increase the burden on schemes having to produce more and more information for the regulator?

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Unknown

I think it's a proportionate amount of data, given that some of these schemes could be governing, you know, 50 or 100 billion pounds worth of assets within the next few years. But we have to really crystallize the data for us to make sure that this data is actually what is driving good outcomes. And I don't I mean, I don't know what you think the UK, but sometimes I think value for money could basically be called a massive data standards exercise.

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Unknown

You know, how do you get comparable consistent data and metrics in the market at the same time to drive good outcomes? And, you know, we've seen a pensions that that has proved to be tricky in the past. If you look at dashboards. But what we want to do is to make sure that, that when we do get to those data points and we do get towards a, you know, disclosure process, we're doing it in a way that creates the least friction with the market.

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Unknown

So how do we do it in a way that is proportionate? How do we do it in a way that delivers the policy intent that enables the market to compete, and us to have assurance that savers really are getting good outcomes? And that means clearly, we're going to have to use our test solutions to make sure we get this right.

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Unknown

And is proportionality a big feature for you to nick at the FCA? Yeah, absolutely.

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Unknown

You know, I, I think I said this earlier, but we know this will be expensive to implement. And it it has to be useful and it has to be proportionate. So we are looking quite hard at what data points could be stripped back without losing anything from the overall framework.

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Unknown

We will need to look very hard at, how the reporting around it works. And we are absolutely intent on getting to a place where where that ultimate that there's ultimately a balance. And there's an overarching focus on utility.

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Unknown

Another area that we've seen a lot of talk around, and you mentioned already, Nick, is the

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Unknown

forward looking metrics within the value metrics industry will be expected to report on, particularly important in respect to illiquid assets.

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Unknown

What was the feedback from schemes on this area of the value for money framework?

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Unknown

I think the main feedback they got is that as people change their portfolio allocations, of course, initially introducing some of these asset classes might not be immediately improving their return. And if it did, it might increase their cost base quite considerably. So having an ability to showcase how such investments might impact might change your investment performance over the longer term is something, people are looking for.

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Unknown

Clearly, what we have to balance there is that focus, by nature uncertain. You know, a lot of the other metrics we have in the, framework are backward looking. So that factual. But we I think we recognize that this is a really important area, and we're working with various industry groups around how to get this right. So I think we are very open to forward looking metrics, but we need to get them right.

00:18:48:09 - 00:19:13:11

Unknown

Yeah, I'd completely agree with that. It's you know, it's always difficult to balance real world outcomes with a hypothetical, but in terms of, you know, TPR, that is something that we are well used to as a regulator within the DB world. I think that, you know, what would I like to see being used in terms of the forward looking versus backward looking?

00:19:13:12 - 00:19:48:00

Unknown

I'd want to see it really influencing current investment governance practices to say that we've set out that we were going to achieve this, but this outcome for different groups of savers, how are we doing in that real world environment and then adjusting their strategy accordingly? And also, as Nick says, you know, if if we're saying that we believe as a regulator that diversified investments are broadly a good thing, then actually inhibiting investment in certain asset classes would seem to be a bit of an angle.

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Unknown

It's just about getting this right.

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Unknown

So in another place that we really want to get it right is, finding a way to properly recognize the importance of good quality service. Okay. Can you talk to me a bit about how you hope to capture good quality service as a metric within the value for money framework?

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Unknown

Yeah. Let me start by saying, I think measuring quality of service is the hardest part of this whole time, because, you know, investment returns cost, there's lots of precedence for how you measure them.

00:20:24:09 - 00:20:56:08

Unknown

But service matters. So the inverse, if you said that's going to ignore service entirely in a value framework doesn't seem right. So we have to get to a place where we can find a proportionate and light touch way of bringing service into this. It's the area where I think we had the most feedback and where there is, most disagreement within industry as well, actually, about what good looks like.

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Unknown

Patrick, why do you think there's so much disagreement over what good looks like in this particular area?

00:21:02:14 - 00:21:25:07

Unknown

That's a really interesting question, Dan. I think, in part because the link between service quality and outcomes, is tricky to show. And so a lot of people invest in different products and services, to inform and enable and help members.

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Unknown

But actually getting to the bare bones of what is it that is generating a good outcome is problematic. And and actually people people do have quite varied service provision within the marketplace where I would say the quality of service becomes even more important is if and when the framework looks to to accumulation. Because I think actually the member or saber making the right choice for them in a high quality product is going to be really important.

00:21:58:02 - 00:22:05:12

Unknown

And so, I'd say this is an important sort of starting, starting block, but we're going to have to build from it.

00:22:05:12 - 00:22:18:13

Unknown

So that's an interesting point. The value for money framework that we're creating now might be a starting point to have something that goes further into when people are actually drawing down their pensions.

00:22:18:13 - 00:22:20:05

Unknown

Do you see this?

00:22:20:05 - 00:22:26:04

Unknown

Both of you, Nick? First, do you see this as something eventually that savers will be looking at?

00:22:26:12 - 00:22:56:01

Unknown

Well, that's an interesting question. You know, the framework isn't designed with savers in mind. It's designed in the first instance for decision makers. And some of the metrics that we are proposing are really quite complex compared to what you'd expect a consumer to, Have to work their way through. So it's very much aimed at decision makers.

00:22:56:01 - 00:23:22:11

Unknown

In the first instance. But clearly in other financial services products, it is not uncommon for consumers to form a view, for example, on the costs but also on the return service saving that I think that would be quite some time off. I mean, Patrick, I don't know what you think. We haven't. We discussed this evolution very much yet.

00:23:22:13 - 00:23:48:15

Unknown

No, I think, you know, from Tpg's perspective, workplace pensions, institutional investors and making decisions on behalf of savers. It's really important that they make good decisions based on the fact that most people do not engage with their pensions. But, I think that dashboards does start to introduce a new market dynamic. And over time, I am sure that will be a consideration.

00:23:49:02 - 00:24:07:08

Unknown

A particularly with some of the broader work that you guys are doing with, the advice, guidance border. I think that, it's just a little way off now because, as you say, we're really focused on that kind of technical audience to make sure that they are acting in the members interest. Yeah.

00:24:07:08 - 00:24:21:12

Unknown

So without the value for money framework, the decision makers that are making decisions about other people's money, well, what have they been basing it on so far, if not investment performance and quality of service?

00:24:22:01 - 00:24:41:08

Unknown

Well, they will be making those decisions based on those metrics. That the issue has been the comparability and the consistency of those metrics and understanding looking across to say, how am I doing versus my peers? And so what we're seeking to do is to really enable, empower the market to make the decisions that they inevitably want to do.

00:24:41:08 - 00:24:52:03

Unknown

Because my impression working in industry is that, you know, I'm working with industry is that they, you know, the vast majority of people want to do the best by their savers.

00:24:52:03 - 00:25:12:05

Unknown

So ultimately the framework will help make it easier. And for them to do that and the decisions that they make will be made on more robust evidence. It will be standardized about to compare it better and ultimately better decisions should lead to better outcomes for savers.

00:25:12:06 - 00:25:26:15

Unknown

Yeah. And the employer and employer is empowered to make a, a decision for their staff that is right for their staff because they know what what schemes are offering that that is right for for their for their colleagues

00:25:26:15 - 00:25:35:15

Unknown

in the UK. How do you think that employers will create the framework when it's eventually in place?

00:25:36:03 - 00:25:44:05

Unknown

Have you heard much from them in the in the in the feedback that you've had for consultation from the consultation so far, was it mostly been schemes?

00:25:44:05 - 00:26:01:00

Unknown

We happened. It's mostly been firm schemes. Trustees. But I think that doesn't mean employers don't have, you know, employers play a hugely important role and they market, you know, they're often seen as very trusted source of information by their staff.

00:26:01:01 - 00:26:15:13

Unknown

Or do we should bear in mind that, you know, employers vary in in size and shape, and not all of them are able to, you know, employees will be able to support all their members in different ways.

00:26:15:13 - 00:26:29:11

Unknown

Yeah, I agree with that. Nick. I, I think that point on size is really important. So, you know, you might have large employers that would consider pensions to be an important part of their value proposition.

00:26:29:12 - 00:26:51:10

Unknown

They might be advised when they're thinking about that wider proposition. And they would look at pensions in that light. And then you have other small employers who who just want to comply. And and actually that's fine too. Providing aid, we can put a framework in place that means that we know that the market is effectively functioning.

00:26:51:10 - 00:27:03:01

Unknown

So Nick, it's this once the value for money framework is in place, is that our work done in terms of trying to change behavior around investment?

00:27:03:08 - 00:27:26:14

Unknown

No. You know, the money value for money framework can only be a tool. Really. The whole debate about value for money is about ensuring that there's a mindset shift so that everyone is focused on long term value for members, not just on immediate cost. And we can achieve that through writing some regulations we can't achieve. That's right.

00:27:26:14 - 00:27:49:07

Unknown

Provided some more so, but I think there's been a lot of debate about that in industry more generally. I think that debate has shifted significantly over the last few years with a huge focus actually on value. And I think a recognition that there needs to be more of a focus on long term value. And then the framework can give to give additional tools.

00:27:49:07 - 00:27:59:03

Unknown

Yeah, but it's not in itself going to be the solution to, how we achieve value generation for members in the long term.

00:27:59:03 - 00:28:06:04

Unknown

Is that your view to Patrick, that the more will need to be done on top of this framework that isn't just in regulation? And

00:28:06:04 - 00:28:17:03

Unknown

yeah, I mean, totally. It's a really good, starting point. And actually the implementation of the framework is really important here because we have to be conscious of unintended consequences.

00:28:17:03 - 00:28:32:12

Unknown

You know, as Nico said, the clear outcome we are seeking is better long term returns for savers. And this is going to be one tool in the arsenal, but we're going to have to work with industry to really look at those cultures and behaviors and what is driving outcomes to make that reality.

00:28:33:01 - 00:28:39:11

Unknown

Thank you both. It's been great to hear a bit more about the work that's going on to configure each aspect of the framework's development.

00:28:39:11 - 00:29:03:04

Unknown

So thank you both for your time. But unfortunately we have come to the end of the recording time we have allowed. I should just mention that we expect, the Dwp's focus at the moment is on the pensions bill, which is expected to commence passage through Parliament shortly, and this will include value for money framework requirements that apply to both contract and trust based schemes.

00:29:03:05 - 00:29:29:07

Unknown

And we're looking forward to, updating our audience on the passage of that bill as soon as we have that information available. But what I'd like to do is to really thank our audience for how engaged they've been with the consultation so far. It's really important, as we've heard from both of you, that we hear industry views so that we can make the eventual framework something that works for everyone.

00:29:29:08 - 00:29:40:15

Unknown

So all that's left for me, for today is to say thank you to unique and thank you to you, Patrick. Your time just and thank you.