Value for Money framework a complex and ambitious initiative that requires more work

In its submission to the FCA’s CP24/16 Value for Money Framework consultation, the PLSA acknowledged the depth and technicality of the consultation and welcomed the extensive engagement the regulator has had with industry to date.

However, the PLSA has raised concerns about how the overall framework will work, the risk of competing objectives compromising the intended outcomes of the policy, and the extent to which key elements may be counter-productive to driving a focus towards long-term value, and away from cost.

The PLSA’s concerns are outlined in full in the submission. Some examples are included below.

Misleading comparisons

The Red-Amber-Green (RAG) rating system proposed promises simplicity, however, the sheer number of data points to compare, as well as the number of areas which will require additional contextualisation, could lead to a wide range of scheme performance masked within a green rating, as well as creating a significant regulatory burden. Schemes captured within the framework serve very varied demographics, and the ‘score’ of some metrics proposed will reflect that membership profile more than they reflect the value of the service offered.

Anything but close supervision to ensure proper compliance with the framework, could result in schemes with very varied performance being graded as green. As a consequence the current approach is unlikely to drive meaningful consolidation in the market.

At this stage, the audience for the reporting requirements is not clear enough. The PLSA is concerned third parties may take uncontextualised data from disclosures to produce misleading league tables that savers – or even employers – may act on, resulting in poor outcomes.

Investment strategy implications

The PLSA is concerned the returns data disclosures proposed will discourage allocation to higher risk-returning assets, which are seen as key to shifting emphasis from cost to value.

Typical holding periods for private equity and other ‘productive’ assets are seven to 10 years, but the FCA proposes primary returns data for comparison over one, three and five years. Basing value assessments on such data – while not accounting for forward-looking projections - will likely therefore disincentivise investment in private markets, as it may present schemes as poor value over shorter timeframes.

Non-workplace consolidators not in scope

Some of the worst outcomes occur when savers are tempted – often by incentives – to transfer out of the workplace environment entirely, and into non-workplace consolidators. Such schemes typically charge considerably more than a modern workplace default, despite often not offering any tangibly improved investment services. Therefore, in any conversation about value, we must consider including in scope those areas of the market that the very same savers can easily end up in.

Joe Dabrowski, Deputy Director of Policy at the PLSA said: “We support the drive to improve Value for Money and, done right, this initiative has the potential to drive improved outcomes for savers. However, it is complex and at this stage in its development, the level of ambition and scope of the proposed framework risks creating some unintended issues and losing sight of the intended outcomes.

“To be workable, the overall quantum of disclosure should be reduced and simplified. This should include the removal of the asset allocation metrics, which are not clearly linked to value; a rationalisation of service metrics; and we also recommend data disclosures are conducted, at least initially, on a private basis, so that industry and regulators can assess which data points are useful, comparable and fair, and which are not.

“Such an approach would improve the proportionality of the overall initiative, which currently risks being overly burdensome – particularly given the risk that the objectives will not be met. Finally, the RAG scale needs to be more graduated to avoid cliff-edge results which render the amber score meaningless, and to enable providers genuine opportunities to improve before they close to new business.”

Download the consultation submission from the PLSA’s website.

Mark Smith, Head of Media Relations

020 7601 1726 | [email protected]

Cali Sullivan, PR Manager
020 7601 1761 | [email protected]