In summary of the value-for-money framework, Nausicaa Delfas, chief executive of The Pensions Regulator (TPR), said: “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.”
A traffic light rating system for workplace pension schemes is under consultation as part of a proposed framework “designed to shift the focus from costs to long-term value” for retirement savers.
As part of the joint framework proposed by the Financial Conduct Authority (FCA), Department for Work and Pensions (DWP) and TPR, there would be greater transparency over how schemes are performing.
The red, amber and green rating system would allocate schemes after being compared on public metrics “that demonstrate value” that isn’t just about costs and charges, but also investment performance and service quality.
Poorly performing schemes would be required to improve or, ultimately, protect savers by transferring them to better schemes.
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“This should lead to better value pensions, without savers themselves having to take action”, the FCA suggested.
It added that focusing on value rather than costs “will enable providers to invest in assets [that] could deliver greater long-term returns but have higher management costs, such as infrastructure or venture capital.”
‘Pensions fit for the future’
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.”
Emma Reynolds MP, Minister for Pensions, said: “Last year, over £130bn was saved into workplace pension schemes – money [that] 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.”
Reaction from the pension industry
Tom Selby, AJ Bell’s director of public policy, said: “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. So increased transparency and tools to make it simpler to compare pension products is a step in the right direction.
“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.”
Tom McPhail, director of public affairs at The Lang Cat, 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.
“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 [is] 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.”
Laura Myers, LCP partner and head of DC at Lane, Clark and Peacock, said: “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 [that] 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”.
