Industry experts have hailed the Financial Conduct Authority’s new plan to give pensions savers better value for money as a “great first step”.
Under the proposals, published today (7 August) defined contribution (DC) pension schemes will be required to disclose how they are doing across the three key metrics.
These are investment performance, quality of service, and cost.
Each will be assessed against a red, amber and green ‘traffic light system’ to determine which – if any – need attention.
Poorly performing schemes will be required to provide an action plan of how they will improve or if they don’t, “protect” savers by transferring them to better schemes.
Commenting on the Value for Money framework public consultation, which runs until 17 October, Quilter’s head of retirement policy Jon Greer said: “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.”
Greer said the majority of pension savers are already enrolled in large master trusts or contract-based workplace schemes that have stringent charge requirements.
“These schemes are already subject to rigorous standards and transparency through existing governance requirements,” he said.
“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.”
Jamie Jenkins, director of policy at Royal London, said: “This is a welcome development for workplace pensions and should start to redress the balance between price and value, which has become overly focused on the former.
“There are certainly lessons to be learnt from a similar initiative in Australia but, with a sensible implementation approach, this could be a very valuable exercise in building on the success of automatic enrolment.”
Clare Stinton, head of workplace savings analysis at Hargreaves Lansdown, said: “The FCA has issued a red alert to pension providers not offering value for money and supporting the long-term interests of their members.
“The Value for Money framework sees providers and decision makers become the green shining light that can guide millions to a brighter retirement.”
She said the service element of the framework “goes beyond basic hygiene factors”” and asks schemes to measure and compare member engagement across five metrics.
“These clear measurables will make it easier to compare pension providers when assessing for value for money and hold those who don’t to account.
“This is a great step forward for pension savers, who typically join a provider of their employers’ choice, as they can clearly see how well their provider performs against these metrics.
“Ever since the introduction of auto-enrolment in 2012, there has been a race to the bottom on costs.
“This piece of work recognises that low costs alone do not deliver value for money.”
Tom Selby, AJ Bell director of public policy, said making it simpler to compare pension products was “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,” he said.
“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.”
Pete Glancy, head of policy at Scottish Widows, said: “The proposed Value for Money framework makes sound logic, taking a long-term, holistic approach which will help savers boost their pension wealth.
“At the moment workplace pension administrators often make decisions on pension schemes based solely on price.
“By allowing value to instead be calculated across all types of defined contribution pension scheme on a fuller set of criteria, the new framework will consider factors which should lead to better retirement outcomes for pension savers.”
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.”
McPhail said there “is a lot to like” in this consultation, including the focus on investment returns, charges and member services.
However, 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, he added.
McPhail said it was also “disappointing the FCA appears to have rejected the inclusion of forward-looking metrics” within the investment performance work.
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