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The UK regulator has revised its plans for how pension funds will be compared in terms of the value for money they provide, as part of a major push to drive better outcomes for retirement savers.
In a consultation published on Thursday, the Financial Conduct Authority tabled a slew of changes to how pension funds will be assessed from 2028, including a four-point traffic light rating system to make comparison of workplace schemes clear and easy.
Value for money assessments will be shown in a colour rating, with dark green for strong performance, light green for good value, amber requires improvement, and red for poor value. Previously, the regulator proposed using only three ratings.
Any pension funds rated as amber will need to put measures in place to improve performance within three years and those rated red will have to do a bulk transfer of its members to another provider.
On the reporting side, under the plans funds will also be required to disclose expected net investment returns over the next 10 years, instead of assessments being made against backward-looking metrics only as previously proposed.
Ben Infield, senior policy adviser for long-term savings at the Association of British Insurers trade group, said the industry welcomed “a more nuanced approach on scoring assessments” and the inclusion of forward-looking metrics was also “vital”.
Plans for value-for-money tests were announced in 2023, designed to trigger a cultural shift in the UK workplace pensions market, where employers cannot easily scrutinise and compare pension options and tend to focus on low charges rather than overall value and investment returns.
The FCA said the proposals “aim to make it clearer how pensions perform, what they cost and the quality of service” so that “people can get good value, and so that poor performing schemes are pushed to improve”.
More than 16mn workers have defined contribution pensions. The regulator said value for money makes “a real difference” for pension savers and “over five years, a £10,000 pot could grow to £10,400 in a poor scheme or £15,100 in a high-performing one — 46 per cent more”.
The value-for-money reforms are being introduced through the pension schemes bill that is expected to become law this year. The first regulatory assessments and publication of data are expected in 2028, once regulations are in force.
The regulations come as the government tries to encourage pension funds to invest more in private markets, which it argues will deliver higher returns for savers over the long term, despite incurring higher investment costs.
Last May, the Treasury co-ordinated a voluntary agreement between 17 of the country’s largest defined contribution pension providers to invest at least 5 per cent of their assets in UK private markets by the end of the decade.