A] Prelude*
* For more detailed information about UK pension systems and pension plans, feel free to visit our dedicated webpages:
• https://expatpensionholland.nl/uk-expat-pensions
• https://expatpensionholland.nl/global-pillars-systems
There have since long been many discussions about the efficiency of pension funds and insurance based pension plans. Lack of transparency was always one of the concerns besides too high administrative and investment costs.
A new traffic light-style rating system for workplace pension schemes could improve transparency over their performance and ultimately lead to better value for savers, according to the Government and regulators.
The plans aim to reduce the number of savers sitting in poor-value pensions and schemes would be publicly rated red, amber or green, once the framework is finalized. Competitive pressures should help to drive up standards and over time, regulators expect to see less of a gap between worse-performing schemes and the market average.
B] Support from leading institutions
The Financial Conduct Authority (FCA), the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR) aim to put the joint framework in place for workplace defined contribution (DC) schemes.
This would be used by pension providers and those making decisions on behalf of savers to provide greater transparency over how schemes are performing. Sixteen million people save for their retirement into defined contribution pension schemes.
Under the plans, schemes will be compared on public metrics that demonstrate value:
• Not just costs and charges;
• also investment performance;
• and service quality.
Poorly-performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes. This should lead to better value pensions, without savers themselves having to take action, those behind the plans said.
The proposals will also support the FCA’s objectives around growth and competitiveness. Focusing on value rather than costs will enable providers to invest in assets which could deliver greater long-term returns but may have higher management costs, such as infrastructure or venture capital.
Last year, over £130 billion was saved into workplace pension schemes. Money which we want to see working hard for future pensioners to give them better retirement incomes. Sarah Pritchard, executive director of markets and international at the FCA, said: “Sixteen 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.”
Minister for Pensions Emma Reynolds said: “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. I would encourage responses from across the industry, including trust-based schemes, to this consultation.”
Nausicaa Delfas, chief executive of the Pensions Regulator, 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. This is a great opportunity for the pensions industry to help to transform pension saving for millions, and to deliver greater value for their retirement.”
The FCA is seeking feedback by October 17 on the framework for pension schemes it regulates. Its consultation document said: “We are clear that value for money is not only about a focus on costs and charges – the cheapest schemes to run will not necessarily deliver the best performance in the long term for consumers. Other factors are relevant including the quality of services provided, investment performance and customer experience.”
The document also said that over 90% of workplace pension savers are invested in their scheme’s default strategy. It added: “While many employers want to support the long-term wellbeing of their employees, they don’t have a direct financial interest and switching a scheme is costly.” The framework will fit within the existing consumer duty on financial firms to put customers at the heart of what they do. Under existing rules, firms have an obligation under the duty to consider the value of the pension products they offer.
The Government has recently announced its intention to legislate so that the framework can also apply to schemes regulated by TPR, and feedback is also invited in relation to these schemes. Responses will be shared with the Government and TPR.
C] Possible extension of plan
We believe this framework should be expanded to include non-workplace pensions as soon as possible and be a feature of commercial dashboards at launch, so that savers can easily compare pensions across the whole market. Pensions dashboards are also in development, which will eventually help people to see all their pension pots in one place online.
D] Critical Review helps the plan
Laura Myers, head of DC pensions at consultancy LCP said: “These are radical proposals which will shake up the workplace pension market. But it is vital that the Government’s drive towards bigger and bigger pension schemes does not ignore the value which is provided to members by many high quality smaller and medium-sized schemes. The priority must always be the best outcomes for scheme members and not simply size for size’s sake.”
(We often see that regulators internationally maybe focus too much on just having few providers and big plans.)
Patrick Heath-Lay, chief executive of the People’s Pension, said: “We expect that this reform package will rightly move conversations from cost to value and seek to drive better outcomes for savers across the workplace pension market. We expect that there will be market and regulatory consequences for schemes that don’t measure up. We believe this framework should be expanded to include non-workplace pensions as soon as possible and be a feature of commercial dashboards at launch, so that savers can easily compare pensions across the whole market.”
Becky O’Connor, director of public affairs at PensionBee, said: “It’s currently close to impossible for people to compare pension plans between providers and to know whether they are getting a good deal. There is arguably no other product or service people pay for that they know so little about. As this consultation highlights, there is more to value for money than cost. Better transparency, as well as education, could help pension savers work out if they are getting a good deal in the same way they do for other financial products. It should also mean that if they are not happy, they can move their pension more easily to one that represents better value.”
Yvonne Braun, director of long-term savings at the Association of British Insurers (ABI), said: “Shifting the culture of the pension system away from ‘cost is king’ to a focus on overall value should enable more investment in illiquid assets and better outcomes for savers. It’s very important that the rule changes are effective and proportionate and align appropriately with the consumer duty, and we look forward to engaging on this with the FCA.”
E] Finally
We applaud this initiative to create more value for the participants of DC pension plans in the long run. It is our experience, having seen pension communication in many countries, that it might be advisable to not focus on complete communication towards participants but to communicate the essence in simple words. Otherwise they will just not understand as pension specialists all over the globe have a knack for communication in jargon. And that just does not work!