Pension schemes’ costs, charges, investment performance and service quality will be publicly rated red, amber and green under the new value for money (VFM) framework.
The DC pensions framework, created jointly by the Financial Conduct Authority (FCA), the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR), is the subject of a further round of consultation published today.
Poorly performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes, without savers themselves having to take action. However, the consultation has not ruled out allowing providers to move members from a failing default arrangement to an alternative arrangement run by the same organisation that is performing better. But regulators say they will look to ensure providers do not game the system by running multiple defaults to ensure they have an alternative home for members if their principal default fails a future performance test.
The FCA says the proposals support its secondary growth and competitiveness objective. Focusing on value rather than costs will enable providers to invest in assets which could deliver greater long-term returns but have higher management costs, such as infrastructure or venture capital, says the regulator.
The regulators say there is no set start date, but they are looking to get the system in place quickly.
Analysis of charges will require schemes to demonstrate how their charging structure impacts different cohorts, potentially exposing providers with fixed separate administration charges who take on employees in sectors with low contributions or short service periods.
Sarah Pritchard, executive director of markets and international at the FCA, says: “16 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.”
Emma Reynolds MP, Minister for Pensions, says: “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, says: “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.”
Steve Watson, director of policy & research, NatWest Cushon says: “This consultation was originally planned for the early summer, before being sidelined by the General Election, so we welcome the fact this really important regulatory initiative is back on track.
“We welcome better communications to members and an accessible value for money framework, so this traffic light system on value for money could provide a source of clarity in the industry. But it does run the risk of oversimplifying a complex topic because value means different things to different people.”
Watson added: “Given the new government’s focus on productive finance, which has the potential to boost growth and deliver higher returns, it is also important this framework isn’t too heavily focused on costs and past performance. If these two metrics carry too much weight, they could inadvertently drive ‘middle of the road’ investment strategies that exclude more expensive assets like unlisted equities.
“On that note, to exclude forward-looking performance metrics as part of the framework is a missed opportunity. To not include them may push schemes away from those productive UK assets the government wants pensions to pursue and again drive pensions towards a middle ground.
“We recognise the risk with forward-looking metrics, but as the DWP’s paper on this topic pointed out recently, there are ways around those potential issues.”
Patrick Heath-Lay, chief executive officer of People’s Partnership, provider of The People’s Pension, says: “We expect that this reform package will rightly move conversations from cost to value and seek to drive better outcomes for savers across the workplace pension market. We expect that there will be market and regulatory consequences for schemes that don’t measure up.”
“We believe this framework should be expanded to include non-workplace pensions as soon as possible and be a feature of commercial dashboards at launch, so that savers can easily compare pensions across the whole market.”