PENSION savers will get better value for money under new rules set to be introduced by the City watchdog, the Financial Conduct Authority (FCA).
Financial regulators, along with the government, will force workplace pension schemes to be rated red, amber or green to show whether they are providing “good value” for savers.
This rating system will compare schemes publicly based on their overall value, including their costs and charges, investment performance and quality of service, the government said.
Pension schemes will be required to disclose this rating to customers to provide greater transparency.
And, poorly-performing schemes will be required to improve – otherwise action will be taken against them or they will have to transfer savers to better schemes.
The aim is that this will reduce the number of savers leaving their cash in poor-value pension schemes, boosting their savings long-term.
The rating system will also put more pressure on pension schemes to improve their standards or exit the market, benefiting all savers.
The new framework will be introduced by FCA along with the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR), in a bid to improve pension savings.
It comes as the Government recently announced plans to introduce a Pensions Bill, along with a review of workplace pensions, which will aim to add £11,000 to the average saver’s retirement pot.
Recent data suggests millions of savers don’t have enough money set aside by the time they retire, leaving many struggling in later life.
Think tank The Resolution Foundation has estimated around 13million people are currently not saving enough to meet the minimum target for an adequate retirement.
Emma Reynolds MP, Minister for Pensions, said: “Last year, over £130billion 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.
Sarah Pritchard, executive director of markets and international at regulator the FCA, added: “16million people save for their retirement into defined contribution pension schemes.
“We’re working with the Government and TPR 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.”
The consultation is due to end in October, but an exact timeframe for when the changes could come in hasn’t yet been confirmed.
Why is the government focusing on value for money in pensions?
Millions of savers are automatically enrolled into their workplace pensions and slowly build up a pot of money for retirement.
Under auto enrolment, workers have to pay in a minimum of 5% and employers must pay in 3%.
This cash is then managed by pension schemes on savers’ behalf, including choosing investments to help the money grow over time.
At the same time, savers are charged a fee by their pension schemes to cover these running costs.
But there are concerns that many savers are not getting good value for money from their pension providers, as there has been little incentive for some firms to improve their standards.
What is pensions auto-enrolment?
HERE’s what you need to know about pensions auto-enrolment:
What is pension auto-enrolment?
Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
When does auto-enrolment apply?
You will be automatically enrolled into your work’s pension scheme if you meet the following criteria:
- You aren’t already in a qualifying workplace scheme.
- You are aged at least 22.
- You are below state pension age.
- You earn more than £10,000 a year
- You work in the UK.
How much do I contribute?
There are minimum contributions that you and your employer must pay.
Your minimum contribution applies to anything you earn over £6,240 up to a limit of £50,270 in the current tax year. This includes overtime and bonus payments.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
What if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Can I opt out?
You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.
As a result, some schemes have got away with investments performing poorly or service standards not being up to scratch.
The new rules will aim to force schemes to improve by making them disclose whether or not they are providing poor value, which could encourage some savers who weren’t engaged before to consider switching to another firm – driving up competition.
The government said it will also act against firms which are consistently under-performing under the new framework, meaning they won’t be able to rest on their laurels.
The government said in its consultation document, published today: “We will not hesitate to take action against consistent under-performance, and we will require schemes to discontinue or consolidate to a better run, better performing, value for money scheme.
“We believe that standardised, consistent, and transparent data and assessment can drive real improvements and create the change in thinking that is needed in the pension sector, encouraging competition, driving good schemes to get better, and requiring poorly performing schemes to exit the market.”
Tom Selby, AJ Bell director of public policy, said: ““Having a common framework will push pension schemes to compare the value for money they offer on a like for like basis.
“This will hopefully encourage, or even shame schemes, into improving their offering to customers – whether that means better investment performance, lower charges, slicker service or a combination of all of those things.”