The UK market watchdog proposed on Wednesday a traffic light system to indicate the value-for-money of pension schemes to savers, with underperforming schemes potentially having their funds transferred to a better-performing regime if a red light is shown.
The newly elected Labour government wants pension schemes to perform better for savers and to build larger funds to help bridge the country’s investment deficit in British infrastructure and growth businesses, as part of the “Mansion House Compact.”
“Underperforming schemes will need to improve or, ultimately, protect savers by transferring them to better schemes,” the Financial Conduct Authority (FCA) stated in a release.
The FCA proposed a “value for money” framework to which defined contribution (DC) pension schemes, the most common form of retirement plan, should adhere.
“Schemes will be compared based on publicly available indicators that show the value not only of costs and charges but also of investment performance and service quality,” the FCA said.
“Once the final framework is established, schemes will be publicly rated as red, amber, or green.”
The government plans to legislate so that the framework is extended to the entire pension market as part of a sector-wide review.
On Wednesday, Finance Minister Rachel Reeves urged pension schemes to continue to “support Britain” and to consolidate to enable more investment in productive assets.
The FCA said that by consulting defined contribution pension schemes now, which cover 16 million savers, future changes can be accelerated across the system when the government’s pension legislation is ready.
The Investment Association, representing asset managers, said the new framework provided a “tremendous opportunity to improve the workplace pension landscape” by broadening investment opportunities available to schemes.
The FCA stated that focusing on value rather than costs would allow schemes to invest in assets offering better long-term returns, even if they have higher management costs, such as infrastructure and venture capital.
The proposals also include a year-end reporting obligation on the type and geographic location of assets in which schemes invest, as the government seeks to increase the pressure to place more liquidity into UK-based assets.
These rules could reshape the sector.
“We expect that greater transparency will prompt some providers to question whether they have the scale and allocations needed to offer good value,” said Sarah Pritchard, executive director of markets and international at the FCA.