Consultation on the Value for Money Framework for Defined Contribution workplace pensions

On 8 January the FCA jointly with TPR published a further consultation and discussion paper (CP26/1) on an updated Value for Money (VFM) Framework for workplace DC pensions. The paper responds to the initial August 2024 consultation (CP24/16). The aim of the regime is to drive long‑term value and comparability across the market by requiring greater transparency over how workplace pension arrangements are performing. Providers will be required to publish a range of metrics that indicate value – costs and charges, but also investment performance and service quality – together with a public value rating (red, amber, light green or dark green). Poor performing arrangements will be required to improve or transfer savers elsewhere.

The paper operates as a consultation on the proposed FCA Handbook rules and guidance for contract-based arrangements, and a discussion paper on trust-based arrangements inviting input which can be used in developing the regulations enabled by the Pension Schemes Bill, on which there will be further consultation after the Bill has received Royal Assent. The FCA consultation closes on 8 March 2026, with first VFM assessments under the FCA rules (and DWP legislation) targeted for 2028.

Scope

The FCA has largely retained its originally proposed scope. The VFM Framework will apply to workplace DC default and quasi-default arrangements in accumulation where that have been operating for at least a calendar year. ‘Default arrangements’ are those where contributions to an automatic enrolment (AE) scheme are invested without the employee having made an active choice, and ‘quasi-default’ arrangements are those where a pre-AE arrangement of a workplace pension scheme is treated as akin to an AE default arrangement.

The FCA describes this as an arrangement which may be open or closed to new savers and is used by at least 80% of employees and ex-employees of at least one  employer. Small arrangements (fewer than 1000 members) that are one of multiple default or quasi-default arrangements for a scheme and not the main/largest one are excluded, as are Executive Pension Plans and Small Self-Administered Schemes.

This is the FCA’s initial scope which it believes will mean the regime benefits the least engaged savers at most risk of poor value to start with, but the scope is intended to be expanded in future.

Metrics for disclosure

As originally proposed, providers will have to disclose a range of metrics about in-scope arrangements, including:

• Backwards-looking and forwards-looking investment performance metrics
• Cost and charges information
• Quality of service metrics, including saver engagement
• A features table
• Asset allocation information

The FCA has proposed various amendments to the scope of the metrics required and the technical methodologies required to calculate them.

Disclosure to a central VFM database

The FCA proposes that instead of publishing VFM framework data on providers’ websites alone, firms will be required to submit their data to a central VFM database along with all other reporting firms and include a link on their own websites to the database.

Assessment and RAGG rating

Independent governance committees (IGCs) must assess whether arrangements provide value or not based on the VFM data. One of the key differences in the updated proposal is that IGCs will have to compare their metrics against a commercial market comparator group rather than three  self-selected comparators. Assessments will have to be conducted through a 3-step process leading to a determination of value against one of four ratings (red, amber, light green, dark green).

The FCA’s description of the RAGG ratings is:

• Dark Green: Value. Clearly outperforming, no or few improvements could be made
• Light Green: Value. Improvements could be made to increase value
• Amber: Not value. Can be improved to reach value
• Red: Not value. Cannot be improved to reach value – must transfer where in best interests of members

An arrangement’s rating will have to be included in the IGC Chair’s annual report and the five  most recent reports made available to the savers and their employers.

Regulatory consequences for poor value

Where an arrangement is assessed as not delivering VFM (amber or red) firms must:

• close the arrangement to new employer contributions
• communicate the rating and next steps to all contributing employers
• communicate the rating to the FCA
• prepare an improvement plan (for amber ratings) for improvements to the arrangements so that they provide VFM or to transfer savers to another arrangement that delivers VFM, or an action plan (for red ratings) for transferring savers to another arrangement that delivers VFM (or improving the arrangements if a transfer is not possible).

Reliance on proposed new FSMA contractual override for regulated DC workplace pension schemes

The FCA is proposing that transfers of savers out of red- or amber-rated arrangements must use the proposed new powers in the Part 7A FSMA contractual override for FCA-regulated pension schemes currently included in the Pensions Schemes Bill. These proposed powers would allow FCA-regulated pensions providers to make certain unilateral changes to pension schemes including transferring members to a different pension arrangement which can either be to a new scheme or arrangement within the same provider, or to a new provider or trust-based pension scheme.

Next steps for firms

Firms should review the updated proposals and consider feeding back to the FCA on the implications of the changes to the draft rules for their arrangements.