The FCA has announced the launch of a new framework which will introduce a 'traffic light system' for pension schemes to demonstrate how they perform on long-term value.
The regulator says its framework is designed to "shift the focus from costs to long term value, and ultimately deliver better retirement savings".
The FCA, the Department for Work and Pensions and the Pensions Regulator aim to implement the framework for workplace defined contribution schemes.
It would be used by pension providers and those making decisions on behalf of savers to provide greater transparency over how schemes are performing.
Schemes will be compared on public metrics that demonstrate value – not just costs and charges, but also investment performance, and service quality. They would, once the final framework is decided, be publicly rated red, amber or green.
Poorly performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes. The regulators say this should lead to better value pensions, without savers themselves having to take action.
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.
“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.”
Industry reacts
Tom McPhail, director of public affairs at the lang cat, welcomed the rules, saying "there is a lot to like", but warned that the traffic light system may be seen as overly simplistic. He said: “This overall framework will present a challenge to the commercial viability of pension schemes that don’t meet the standards. Ultimately those that fail this test won’t be around much longer and, as such, it is vital to engage actively with this consultation.
"This work was derailed by the General Election so it’s good to see it back on track. There is a lot to like in this consultation; the focus on investment returns, charges and member services is now fairly widely accepted. Dovetailing this work with the government’s productive finance agenda will still prove a challenge. The adoption of the Red Amber Green traffic light system may be seen as overly simplistic for what are a complex array of scheme metrics. It is also disappointing the FCA appears to have rejected the inclusion of forward-looking metrics within the investment performance work; this was an opportunity to develop an interesting and innovative approach to investment decision-making.”
Jon Greer, head of retirement policy at Quilter, said the framework "is unlikely to result in a significant step change for the industry as a whole in the short term". He commented: "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. 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. 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.
"The lengthy process to reach this point underscores the challenges in achieving consensus on metrics. While it is difficult to argue against the principles of this initiative, its success will ultimately depend on the outcomes it delivers. The true measure of its effectiveness will be whether pension schemes can meet these outcome-based standards and genuinely improve the retirement savings of millions.
"While the framework is a positive step towards improving pension schemes, it is only one part of a broader effort. The focus should remain on the outcomes, ensuring that pension savers receive the best possible returns and services for their retirement.
LCP partner and head of DC, Laura Myers, warned that there’s a risk of unintended consequences which could undermine what the government is trying to achieve. She explained: "We have long advocated a change in emphasis from cost to overall value, so the new focus of the VFM framework on a wider range of measures of value is welcome. But there are a number of risks with the new approach. One is that high quality schemes run by individual employers, often with the benefit of an employer subsidy, may not score highly in the eyes of the government compared with giant master trusts, even if member outcomes could be as good if not better. It is important that the government does not focus on size for size’s sake. There is also a risk that schemes will be so afraid of even an ‘amber’ rating that they will be more risk-averse and afraid of being outliers. This could lead to ‘herding’ of investment strategies rather than rewarding schemes which are willing to innovate and invest for the long-term. In short, there is a risk of the law of unintended consequences coming into play with this consultation.”
