Defined contribution plans in the United Kingdom are going to get a unique traffic light-style rating system intended to improve transparency and reduce the number of people mired in underperforming plans.
The UK’s Financial Conduct Authority (FCA), the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR) are currently working to put joint framework in place to create the new rating program for workplace defined contribution (DC) schemes. Plans will be publicly rated red, amber or green once the framework is established.
The FCA is seeking feedback by Oct. 17 on the framework for pension schemes (as defined contribution plans are called in the UK) it regulates. Under the framework, DC schemes must publicly disclose their investment performance, costs and service quality against FCA value-for-money metrics. Schemes must disclose their returns net of transaction costs, returns net of investment charges and performance net of all charges for one, three and five-year periods, plus 10 years and 15 years if available.
Action must be taken if a plan is assessed as red or amber, and an independent governance committee can only give an amber rating if it believes improvements can be made within a “reasonable period of time.” Poorly performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes.
“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,” Sarah Pritchard, executive director of markets and international at the FCA, said in an article posted on UK-based online news publication Independent.
“We want to see a focus on long-term value, not just costs and charges,” Pritchard added. “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.”
Over 90% of workplace pension savers in the UK are invested in their scheme’s default strategy. Pensions dashboards are also in development, which will eventually help people to see all their pension pots in one place online.
“These are radical proposals which will shake up the workplace pension market,” said Laura Myers, head of DC pensions at consultancy LCP, as quoted in the Independent article. “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.”
Given the impact these changes could have, Pritchard said they are working hard now to ensure the pension system can be ready to comply by the time the legislative changes are in place. Last year, over £130 billion ($169 billion) was saved into workplace pension schemes.
SEE ALSO:
• Most Brits Believe UK Retirement Age Should Be Lowered: Survey
• ‘Collective Defined Contribution’ Plans Set to Launch in UK