“Ultimately, past performance is by definition in the past, and you can't have that again. So I really hope there's a future focus on what's going to be the long-term right answer, and that links to private markets as well.
“In the early stage of private markets investments, those assets might not deliver the performance in the short term because you've got a J-curve. So if we're just looking at very short-term performance metrics, there is a concern that it might lead to a bit of herding.
“But hopefully the market is active and thriving enough that we can continue to see innovation and different approaches for different membership populations.”
Extra compliance, extra costs?
While the FCA says the framework is designed to fit within existing consumer duty processes that firms will have put in place, it estimates total costs to industry to be in the range of £29mn to £40mn over 10 years, but outweighed by benefits valued between £430mn and £1.2bn.
“The framework requires providers to do extra work to comply with it,” says Box. “The cost of that work has to be met somewhere along the value chain of pension arrangements. It seems likely that commercial providers will pass on that additional cost to savers.
“One way this can be avoided is through subsidies paid by employers to reduce pension costs for their workforce, and this is an area of the framework we will be looking at closely.”
Box also acknowledges that the framework could push fees back up and closer to the 0.75 per cent charge cap. But he says that competition dynamics mean that fees for many automatically enrolled, default arrangements are significantly below the cap, which he does not expect the government to raise.
Page likewise says that most schemes are considerably under the charge cap already. “Would they bring [the charge cap] down? I don't think there'd be much point, because it would just seem to disagree with this much more holistic approach to thinking about value.
“I don't think there's much appetite to shift that down, and we don't see schemes struggling with it, or feeling it should be higher or lower.”
But what Box expects is that, although the VFM framework is initially being aimed at arrangements regulated by the FCA, equivalent requirements for trust-based DC schemes will be included in the forthcoming pension schemes bill.
“Therefore, these value for money requirements will affect the whole DC pensions sector, and are a huge shake-up in terms of increased compliance work, if nothing else.”
Chloe Cheung is a senior features writer at FT Adviser
