The Financial Inclusion and Markets Centre (FIMC) has published its submission to the Financial Conduct Authority (FCA)/The Pensions Regulator (TPR) recent consultation on a new Value for Money Framework (VFM) for workplace pensions. The submission can be found here: FIMC FCA TPR VFM 0326
As we said in our response to the previous consultation CP24/16, we are supportive of the principle of VFM assessments of pension scheme charges and service quality. FCA/TPR have clearly put much thought into developing a workable VFM framework.
But we are very concerned about the degree of emphasis placed by the FCA/TPR on investment performance, particularly past performance, in the proposed VFM framework. Good past investment performance does not predict good future investment performance. It is very important to recognise that investment based services are not like consumer products or motor cars where the past performance can be used to determine the likelihood of future performance.
We have made significant progress in driving down charges and costs in the UK pensions and investment industry including through the use of the workplace pension charge cap. The weakening of the workplace pension charge cap and now this VFM framework threatens to reverse this progress. The VFM framework with its emphasis on investment performance will just allow investment managers, consultants, advisers, and other intermediaries to divert attention from the importance of costs and charges and actively promote and sell high cost, complex investment strategies which actually offer little added value but introduce greater risk.
It also risks causing more pension assets to be invested in high cost, complex, opaque, poorly regulated and governed ‘alternative’ investment assets and vehicles such as private equity with questionable past performance track records and future prospects.
Disconcertingly, FCA/TPR intend to allow pension providers to select their own assumptions to project future investment performance. There is no logic to allowing firms to select their own assumptions. The risk of firms trying to game the system is all too obvious. Firms will be able to select favourable assumptions about future investment returns and downplay the impact of high charges to attract or keep businesss. FCA/TPR should mandate standardised assumptions to prevent the system being gamed.
Moreover, worryingly FCA/TPR will not require firms and pension trustees to publish the assumptions used to project investment returns or to publish the advice received from external advisers so that independent observers can see whether external advice has been ignored.
Giving past investment performance such a key role in a VFM assessment, and allowing firms and scheme arrangements to use their own assumptions about future performance, could give a false and misleading measure of VFM and undermine the integrity and usefulness of any rating system intended for comparison. Overall, we think the proposed framework risk misleading pension savers and distorting the market. It is likely to result in poorer quality and value outcomes for ordinary pension savers and investors and less efficient allocation of resources by financial markets.