On Wednesday, Britain’s markets watchdog proposed a traffic light system that would display savers how much value for money they get from their pension, with laggards potentially having their assets shifted to a better performing plan if a red light flashed.
Under the so-called Mansion House Compact, the newly elected Labour government plans to benefit savers and develop larger funds to address the cash-strapped country’s investment shortfall in UK infrastructure and growing industries.
“Poorly performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes,” the Financial Conduct Authority said in a statement.
It proposed a ‘value for money’ framework that defined contribution (DC) pensions, the most common type of pension, would be required to meet.
“Schemes will be compared on public metrics that demonstrate value—not just costs and charges but also investment performance and service quality,” the Financial Conduct Authority (FCA) announced.
“They would, once the final framework is decided, be publicly rated red, amber, or green.”
As part of a sector assessment, the government intends to pass legislation extending the framework to the pensions market.
On Wednesday, Finance Minister Rachel Reeves urged pension funds to continue “backing Britain” and consolidating in order to invest more in productive assets.
The FCA stated that by making comments now on DC pension schemes with 16 million investors, they can hasten systemic change once the government completes its pensions legislation.
The Investment Association, which represents asset managers, described the new framework as a “huge opportunity to improve the workplace pensions landscape” by broadening the investment choices available to schemes.
The FCA stated that focusing on value rather than costs will allow plans to invest in assets with higher long-term returns but higher management expenses, such as infrastructure and venture capital.
The measures also include the required end-of-calendar-year publication of the type and geographical location of assets in which schemes invest, as the government wants to raise pressure to invest more money in UK-based assets.
The regulations could reshape the industry.
“We anticipate that increased transparency will prompt some providers to reconsider whether they have the scale and allocations to provide good value,” said Sarah Pritchard, the FCA’s executive director of markets and international.
