The Financial Conduct Authority (FCA) has revealed its plans to improve the value delivered by workplace defined contribution (DC) pension schemes.
Working with the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR), the FCA intends to implement a ‘joint framework’ for workplace DC schemes.
Pension schemes will be compared on costs and charges, but also investment performance and service quality. They will be publicly rated red, amber or green, depending on how they are performing.
The framework would be used by providers and those making decisions on behalf of savers to provide greater transparency, the FCA said. Poorly performing schemes will be required to either improve or transfer savers to better schemes.
Sarah Pritchard, executive director of markets and international at the FCA, said: “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.
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“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.”
Jon Greer, head of retirement policy at Quilter, is sceptical. “As of yet, the new Labour government has not departed wildly from the pension policies of its predecessor with a continuation of the joint framework by the FCA, DWP, and TPR,” he said.
“This initiative aims to close poorly run schemes, consolidating pension saving, which could potentially improve the overall outcome for pension scheme members. However, the actual impact of these changes remains unlikely to move the dial a tremendous amount in the short term.
“Currently, the majority of pension savers are already enrolled in large, well-managed master trusts or contract-based workplace schemes that have significant oversight and stringent charge requirements,” Greer continued.
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“These schemes are already subject to rigorous standards and transparency through existing governance requirements. Therefore, while the new framework might lead to further consolidation of smaller schemes, it is unlikely to result in a significant step change for the industry as a whole in the short term.”
Tom Selby, AJ Bell director of public policy, sees the move as a positive step.
“The aim of the value for money (VFM) framework is to deliver an easy way for schemes to compare themselves against their peers to find out if they offer equally good service to customers,” he said.
“The metrics are expected to cover a wide range of areas including past investment performance, charges, communications and administration. Ultimately, this all needs to be digestible for trustees and providers if they’re to make use of the information, with the industry expected to develop ‘league tables’ curated by industry commentators which compare and contrast pensions.
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“While it is relatively easy to compare modern investment platform Sipp accounts and review the performance of funds you might select on a platform, it is comparatively difficult to get hold of information on workplace pensions.
“Savers should get a statement every year outlining what fees they’re paying and the investment returns delivered, but many aren’t sure what to do with that information and how to benchmark their current provider against alternative options,” Selby continued. “So increased transparency and tools to make it simpler to compare pension products is a step in the right direction.”
