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The UK regulator has revised its plans to compare pension funds in terms of the value of money they provide in a major effort to drive better outcomes for retirement savers.
In a consultation published on Thursday, the Financial Conduct Authority introduced a number of changes to how pension funds will be assessed from 2028, including a four-point traffic light rating system to make comparisons of workplace schemes clearer and easier.
Value for money assessments will be shown in color ratings, with dark green for strong performance, light green for good value, amber requiring improvement and red for poor value. Earlier, the regulator had proposed using only three ratings.
Any pension fund rated as amber will be required to take measures to improve performance within three years and those rated red will have to transfer their members en masse to another provider.
On the reporting side, funds under the plans will also be required to disclose expected net investment returns over the next 10 years, rather than simply assessing them based on backward-looking metrics 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 to scoring assessments” and that the inclusion of forward-looking metrics was also “important”.
Plans for a value for money test were announced in 2023, designed to bring about a cultural change in the UK workplace pensions market, where employers cannot easily check and compare pension options and focus on low fees rather than overall value and investment returns.
The FCA said the proposals aimed to “make it clearer how pensions work, what they cost and the quality of the service” so that “people can get good value, and so that poorly performing schemes are incentivized to improve”.
More than 16 million workers have defined contribution pensions. The regulator said value for money makes a “real difference” to pension savers and “over five years, a £10,000 pot in a poor scheme could grow to £10,400 or £15,100 in a high-performing scheme – 46 per cent more”.
Value for money reforms are being introduced through the Pension Scheme Bill, which is expected to become law this year. Once the rules are in place, the first regulatory assessment and publication of data is expected in 2028.
The rules come as the government is trying to encourage pension funds to invest more in private markets, which it argues will deliver higher returns to savers in the long run, despite higher investment costs.
Last May, the Treasury coordinated a voluntary agreement between the country’s 17 largest defined contribution pension providers to invest at least 5 percent of their assets in Britain’s private markets by the end of the decade.
