The Department for Work and Pensions is moving forward with a number of the proposals within its value for money (VFM) framework.
In a joint publication today (July 11) by the DWP, the Pensions Regulator (TPR) and the FCA, they said the framework intends to retain proposed reporting periods of one, three and five years, with 10 and 15 if available, to allow investment returns to be evaluated over appropriate periods of time.
This comes following the VFM consultation paper in January which proposed that pensions schemes will be required to disclose investment performance, net of all costs, as part of the new framework.
This is because it may be difficult for some providers with vertically integrated business models or with single or combination charging structures to retrospectively determine the split between investment charges and administration charges for longer periods going back.
The government said the proposals would encourage greater transparency and standardisation of reporting across the DC pension market, allowing trustees to make more informed decisions and employers to better compare the value and performance between schemes when choosing where to automatically enrol their employees.
In today’s update, DWP said it recognises that data may not currently be available, but it thinks the main focus for comparisons should be returns over at least five years.
“In future, we expect that schemes will be able to report on more historic returns,” it wrote.
“The VFM framework is designed to allow comparability. Most schemes enter three life-styling phases over a pension saving journey: growth, de-risking, and retirement.
“Respondents told us that these are often not based on a defined age, but instead years to retirement, with different schemes entering these phases at different ages dependent on member needs.”
DWP said it also intends to proceed with a forward-looking metric.
It said: “While we recognise that past performance is not always a guide to future performance, it is the best way to measure actual past and present value to members and is an essential metric for the VFM framework.
“Past performance of an investment strategy reflects the asset allocations by class of asset, which we think is important to inform comparisons of default designs.
“We acknowledge the suggestion to measure member outcomes using internal rates of return, however this would be a large change from our currently proposed metrics, which were supported by most respondents as an effective way to measure past performance.
“It could also result in additional operational challenges and costs to industry.”
The DWP said it recognises tension between requiring sufficient data to enable meaningful comparisons and the costs and complications of the disclosures.
Rachel Vahey, head of policy development at AJ Bell, said: "The metrics will cover a wide range of areas including past investment performance, charges, communications, and administration.
“But the intention is to boil all that down to a single red/amber/green rating, which the DWP expects to be published by the industry in league tables."
