How the value for money framework informs the consumer duty


The DWP’s consultation on measures for a new value for money framework, which closed on March 27th, sets out three tests for workplace and legacy pensions based on net performance, quality of services and costs and charges.

While the scope of phase one of the VFM framework does not include retirement wealth accumulating outside the workplace or retirement income from pension pots, it has potentially profound implications for retail advisers managing retirement plans for their clients.

The DWP’s intention is to produce a consultation response in June or July with a view to introducing primary legislation in a pensions bill later this year. The DWP has said it consider the VFM framework a high priority item and, subject to their being parliamentary time, it is intended to become part of pensions legislation in this parliamentary term.

The VFM framework makes clear that the Government intends to take a much more pro-active role

The likelihood of the Government succeeding in its aim, are thought higher as the framework has had substantial input from both the Pensions Regulator and the FCA. The consultation makes numerous references to the consumer duty and much of it relates to governance of products and services, price and value, consumer understanding, and consumer support.

The three tests of VFM

The current system of VFM assessment rests with IGCs and GAAs who report through Chair Reports and Occupational Trustees who produce Chair statements (confusingly on value for “members”). The intention is to harmonise reporting around three Government certified tests with thresholds that are created around quantitative benchmarks.

These tests will be based on how schemes have delivered positive outcomes through performance, net of cost and charges and the quality of services that members pay for within a scheme. The intention is that the emphasis in scheme appraisal which is currently biased towards measurement of price, shifts to a measurement of value. This is because Government believes that over-emphasis on cost is stifling innovation in terms of the diversification of investments beyond quoted markets and the use of capital productively.

The impact of cost and charges is experienced through net performance so there has been some pressure to drop the cost and charges test altogether. However, the DWP are looking to use the analysis of the AMC to help trustees and employers understand what is going towards investment and what to “services”. A transparent statement of the investment charge allows for service to be measured against cost.

The tests will result in three “RAGs”, traffic light estimates of whether schemes are fit for purpose, in need of improvement or failing the consumer. If they are seen as failing, they will be given limited opportunity to right matters before being required to consolidate with successful schemes – typically master trusts.

Interaction with Consumer Duty

Advisers should be aware of the VFM framework because

  1. It suggests a way for them to measure their performance, relative to cost and services provided
  2. It offers a means to benchmark performance, costs and services to workplace pension
  3. It offers an opportunity to advise employers and trustees, reviewing and changing the schemes they run and participate in.

The VFM framework makes clear that the Government intends to take a much more pro-active role in setting standards and ensuring that those standards are met and this is in line with what advisers see happening with the consumer duty.

The quantitative measurement of services against a charge, using a RAG might well be a measure chosen by an adviser. While what the  tests for quality of services have yet to be determined, it’s clear they will be based on quantitative measures such as trust pilot or independently assessed net promoter scores, the use of member services on offer and evidence that when used, these services are effective.

Similarly, performance will focus on hard backward looking analysis of how savers have done and where forward looking measures are used, they are not the main basis of assessment. This is in line with how value is being measured in a key comparator- Australia, which is seen to have a more mature system of retirement saving and more robust regulation of providers.

While advisers may see the VFM framework as a threat to how they do things today, they should be aware that it represents a useful template for what they do tomorrow.

A benchmark for the quality of services provided by an adviser

Although wealth management will not form part of the VFM framework today, it is likely to impact advice on combining pensions. For instance, the transfer of a pot from a scheme that is scoring green on a VFM RAG, will need to be evidenced it is in the client’s interest than under the current VFM regimes.

Advisers may find their recommendations to consolidate challenged by both schemes and regulators.

This is likely to put a focus on the value assessments carried out on wealth management arrangements managed by advisers which will need to reference the framework’s measures if not adopt them.

The opportunity to fulfil the Consumer Duty

Beyond strict compliance considerations, the framework offers an opportunity which results from the disruption it will bring to the fastest growing part of the private savings market, that operating through the workplace under auto-enrolment.

The framework creates a detailed fact-find on the workplace pension employers are using and, where an adviser has a relationship with an employer’s management or its trustees, this fact-find is an advisory opportunity. The detailed analysis of performance and services, the disclosure of the apportionment of costs and the breakdown and comparison of the quality of services, will need advisory assistance. Where RAGs are being returned orange or red, the onus will be on employers and trustees to take action. Employers are unlikely to want to make changes that impact both their staff and often their own finances, without taking advice.


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Henry straddles the world of traditional finance and FinTech and is an active entrepreneur who helps people make good pension decisions. He founded AgeWage and the Pension PlayPen to map the pensions genome and ensure everyone gets data driven information on value for money

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