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Pensions & Retirement

Hidden compliance risk in Value for Money pension rules

Clare McHenry, head of UK at SuperChoice, discusses the compliance and data risks employers face under the new Value for Money pension rules.

Opinion
7 min read
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The Value-for-Money (VfM) framework is about to fundamentally change how the workplace pensions market operates. But it does not just impact pension schemes and trusts, and could catch thousands of employers and their HR teams off guard too.

Under the joint Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) VfM framework, defined contribution (DC) workplace pension schemes will face new levels of scrutiny. New assessments will measure their value for money, rating them under a new traffic light system. While this framework is still being developed by regulators, it is expected to commence for large workplace pension providers as early as next year.

Across 2027 and 2028, those schemes that are in scope must begin collecting and submitting initial VfM data to the regulators, with the first formal VfM assessment report and data expected to be published in late 2028. Importantly, these assessments will include a public rating, using the ‘traffic light’ model, where schemes will be rated as either Red, Amber, Light Green or Dark Green.

While the work involved is extensive, these reforms have an essential central objective. By shifting attention away from headline fees alone and towards long-term value delivery, overall member outcomes should be improved. Using consistent measures of net investment performance, costs and charges, and quality of service, the framework is intended to make schemes easier to compare. Not just strengthening transparency and accountability, but also making it easier to identify arrangements that are not serving members well.

Underperforming schemes will be required to improve, or even transfer members to better-value arrangements to protect pension savings from persistent underperformance, high costs and weak administration. This will drive improved outcomes for individual workers, but also raise standards across the market and push the market towards consolidation. The bigger the scale and size of a fund, the better overall value it can deliver with access to a broader range of assets with the potential to deliver stronger risk-adjusted retirement outcomes.

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For HR directors, however, these changes also create hidden risks. If your master trust or Group Personal Pension provider receives a Red rating or a sustained Amber rating, the VfM framework effectively prevents it from accepting new business. In some cases, it may also be required to wind down the arrangement and transfer members in bulk to a better-performing scheme.

For employer HR and payroll teams, an underperforming scheme on the VfM framework can trigger a large and highly disruptive data migration project. Thousands of active employee records, historical contribution data and complex payroll mappings must be moved successfully to a new provider.

When you take into account the wider context of the Pension Schemes Act 2026, the situation becomes even more complex. The Act effectively requires multi-employer master trusts to have a sufficient scale, with at least £25bn in their default arrangement by 2030. Those that currently fall under that threshold will be actively looking to consolidate their sub-scale funds with other schemes in order to hit that target.

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The result? A market that is braced for a marked increase in scheme consolidations as these requirements and regulations come into effect.

 The reality of data debt during forced migration

When a bulk transfer begins, the receiving scheme or consolidator fund will need to conduct rigorous due diligence on the incoming member data. For HR teams, this risks exposing years of poor-quality data, which could impact a transfer’s success, even if the employer is not solely responsible for it.

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Many employers still use outdated, highly manual processes to send payroll data to pension providers. But these payroll systems were built primarily to pay employees, not to serve as real-time compliance engines for the Pensions Act 2008. Consequently, these complex payroll environments have been silently accumulating data debt that has remained unnoticed for years.

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Take salary sacrifice and the National Minimum Wage (NMW) as an example. If a low-paid worker’s take-home pay is pushed below the statutory minimum by a pension deduction, the employer instantly breaches NMW law, even if the employee has consented. It is a similar situation with Statutory Maternity Pay (SMP) calculations and variable-shift workers with fluctuating hours, which open the door for mapping errors between payroll records and the pension provider.

Standard payroll software often exports this complex information as non-standardised CSV, XML or flat files. Feeding unfiltered data directly into a master trust’s core registry may cause the file to be rejected, severely delaying statutory fund allocation. Worse, the registry may accept flawed data and permanently compromise the scheme’s system of record. Later down the line, this can have serious consequences for workers accessing the pensions dashboard to locate their pension pots and to understand their projected retirement income.  Even a single piece of flawed or incorrect data can seriously skew these outputs.

Finding and correcting these errors requires substantial manual exception handling, consumes internal resources and increases the risk of prolonged non-compliance.

If data debt has accumulated unnoticed, a forced migration will expose it. And the receiving scheme is likely to leave the employer responsible for reconciliation and subject to scrutiny and enforcement from TPR. For employers with more than 500 staff, Fixed and Escalating Penalty Notices could reach £10,000 per day.

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Manual exception handling is no longer a viable operating model. With the VfM framework incoming, it has become a growing financial liability. During annual pension reviews, HR leaders must look beyond dashboard performance figures and base management fees. Instead, they need to assess how easily their clean data can be received into their provider’s system.

Look beyond base management fees

To limit disruption, reduce the risk of a bulk transfer and avoid legal action that could arise from a provider’s data failures, employers should assess whether the fund makes member-data compliance straightforward.

Beyond fees and performance, what should you look for in a provider?

First, ask if your provider’s portal forces you to reshape payroll extracts into rigid, provider-specific CSV templates. If it does, this increases your exposure to manual processes that could introduce human error and formatting corruption issues. Times this across thousands of employees, and the resulting data debt could spiral into fines and a potential Amber rating for the provider.

Instead, ask whether the provider offers intelligent, automatic mapping that converts differing payroll fields into the required registry format without manual reformatting. For example, the system should recognise that an employer column labelled “Stat_Mat_Pay” corresponds to the scheme’s required “SMP_Contribution” field without the need for manual intervention.

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Secondly, assess whether your employer portal validates files against regulatory rules, TPR guidance and scheme parameters before they are submitted. For example, it should check whether a salary sacrifice deduction breaches the £12.71 National Minimum Wage floor. Or whether an employee’s age and fluctuating earnings correctly trigger an automatic-enrolment assessment, and whether SMP calculations meet statutory requirements. If it finds an anomaly, the system should be able to identify the specific error before it becomes a compliance breach.

Finally, evaluate how well your provider can coordinate its data flows with continuous capital flow. Specifically, can it manage the complex calculations behind underpayments, overpayments and statutory opt-out refunds, without the need for manual intervention from HR teams to adjust spreadsheets by hand?

If your provider meets all of these important and risk-mitigating criteria, you should be confident in its upcoming VfM assessments. If not, it’s time to engage with your provider to address these key service metrics now before a poor VfM rating takes matters out of your hands. 

Employers and HR leaders must take action now to pre-emptively audit their pension scheme’s data ingestion architecture, before VfM enters the picture. By requesting pre-validation, mapping, and automation that can catch and correct errors upstream, HR teams can feel confident in their schemes. Not just from a compliance and regulatory scrutiny perspective, but also from an operational stability viewpoint as we enter an expected period of intense market consolidation.

Clare McHenry is Head of UK at SuperChoice

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