Pension schemes to be rated red, amber or green in plans to improve transparency
Late yesterday evening, the FCA unveiled its plan to monitor Value for Money in UK DC Pension Schemes in line with the consultations last year.
A new traffic light-style rating system for workplace pension schemes could improve transparency over their performance and ultimately lead to better value for savers, according to the Government and regulators.
The plans aim to reduce the number of savers sitting in poor-value pensions and schemes would be publicly rated red, amber or green, once the framework is finalised.
Competitive pressures should help to drive up standards and over time, regulators expect to see less of a gap between worse-performing schemes and the market average.
The Financial Conduct Authority (FCA), the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR) aim to put the joint framework in place for workplace defined contribution (DC) schemes.
This would be used by pension providers and those making decisions on behalf of savers to provide greater transparency over how schemes are performing.
Under the plans, schemes will be compared on public metrics that demonstrate value – not just costs and charges, but also investment performance, and service quality.
Poorly-performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes. This should lead to better value pensions, without savers themselves having to take action.
The proposals will also support the FCA’s objectives around growth and competitiveness. Focusing on value rather than costs will enable providers to invest in assets which could deliver greater long-term returns but may have higher management costs, such as infrastructure or venture capital.
Sarah Pritchard, executive director of markets and international at the FCA, said:
“Sixteen million people save for their retirement into defined contribution pension schemes. We’re working with the Government and the Pensions Regulator to help them get better returns.
“We want to see a focus on long-term value, not just costs and charges. Given the impact these changes could have we are consulting now to ensure that the pension system can be ready to go when the legislative changes that need to happen are ready.”
Minister for Pensions Emma Reynolds said:
“Last year, over £130 billion was saved into workplace pension schemes – money which we want to see working hard for future pensioners to give them better retirement incomes.
“Our Pension Bill and Pensions Review will make pensions fit for the future, and having an effective Value for Money framework will lay the foundations for this.
“I would encourage responses from across the industry, including trust-based schemes, to this consultation.”
Nausicaa Delfas, chief executive of the Pensions Regulator, said:
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“We want every pension saver to get value for money from their pensions.
“That means good investment returns, and high-quality services, for a competitive price.
“This is a great opportunity for the pensions industry to help to transform pension saving for millions, and to deliver greater value for their retirement.”
The FCA is seeking feedback by October 17 on the framework for pension schemes it regulates. These are workplace GPPs , GSIPPs and Stakeholder Pensions.
Its consultation document said:
“We are clear that value for money is not only about a focus on costs and charges – the cheapest schemes to run will not necessarily deliver the best performance in the long term for consumers.
“Other factors are relevant including the quality of services provided, investment performance and customer experience.”
The document also said that over 90% of workplace pension savers are invested in their scheme’s default strategy.
It added:
“While many employers want to support the long-term wellbeing of their employees, they don’t have a direct financial interest and switching a scheme is costly.”
The framework will fit within the existing consumer duty on financial firms to put customers at the heart of what they do. Under existing rules, firms have an obligation under the duty to consider the value of the pension products they offer.
The Government has recently announced its intention to legislate so that the framework can also apply to schemes regulated by TPR, and feedback is also invited in relation to these schemes. Responses will be shared with the Government and TPR.
VFM, the elephant that wouldn’t leave the room
To date, the value for money framework has struggled for credibility. Like many initiative launched in 2023 it was long on consultation and short on action. It is now a part of the Pension Schemes Bill and this announcement makes it clear that VFM applies as much to contract based workplace pensions as to occupational pension schemes such as master trusts.
Establishing VFM as a framework for evaluating pensions allows consumers , whether savers or the employers who decide on their workplace pensions to understand what they have bought to date ( a savings mechanism for retirement).
The Government has made it clear that this framework can be extended to govern the extension of workplace pension schemes to provide post saving product, drawdown, annuities and scheme pensions.
By including VFM in the consumer duty, the FCA intends to broaden its scope. It seems inevitable that the metrics that apply to workplace pensions will apply to non-workplace pensions, creating one pension saving system (and ultimately one way of evaluating their spending).
While I have argued that in a data-centric world, the way that value is being measured looks positively medieval, I have no fundamental problem with the VFM framework which has an important part to play in making pensions easier for the consumer to understand and manage.
