FCA to Implement ‘Traffic Light’ System for Pension Scheme Value Assessments

The Financial Conduct Authority (FCA) has unveiled a new plan aimed at ensuring better value for money in defined contribution (DC) pension schemes across the UK. This initiative is part of a broader effort to enhance transparency and competition within the pension market, ultimately benefiting the millions of savers who rely on these schemes for their retirement.

Under the proposed framework, pension schemes will be required to publicly disclose their performance across three key metrics: investment performance, service quality, and costs. These factors will be assessed using a ‘traffic light’ system, assigning each scheme a rating of red, amber, or green. The intention is to provide a clear and accessible way for stakeholders to evaluate the value offered by different schemes.

Schemes that receive a red or amber rating will be subject to stringent requirements. Those rated amber will need to implement an improvement plan within a reasonable timeframe, while schemes rated red may be prohibited from accepting new business until significant improvements are made. If a scheme continues to underperform after a set period, the FCA may require the transfer of savers to alternative, better-performing schemes.

This new value-for-money framework has been developed in collaboration with The Pensions Regulator (TPR) and the Department for Work and Pensions (DWP). The aim is to create a consistent and transparent method for assessing and comparing DC pension schemes, making it easier for employers and trustees to make informed decisions.

The FCA emphasised that the framework is designed to shift the focus from merely reducing costs to ensuring long-term value for savers. By doing so, the regulator hopes to drive improvements across the pension industry and prevent savers from being trapped in underperforming schemes.

Nina Blackett, interim executive director of strategy, policy, and analysis at TPR, highlighted the importance of this initiative. She noted that while automatic enrolment has successfully increased the number of people saving into workplace pensions, the next challenge is to ensure these savers receive good value for their money.

The framework also seeks to address the issue of inconsistent and opaque performance measurements across different schemes. Currently, schemes often measure success using different metrics, making it difficult for employers to compare options effectively. The FCA’s proposed framework aims to standardise these assessments, making it easier to evaluate and improve scheme performance.

In addition to the traffic light system, the FCA is proposing that pension schemes disclose detailed performance data across different stages of the pension savings journey, including growth, de-risking, and at retirement. The disclosure of past investment performance, as well as the breakdown of various asset classes, will also be required.

The consultation on these proposals is open until 17 October 2024, giving stakeholders in the pension industry an opportunity to provide feedback. TPR Chief Executive Nausicaa Delfas described the framework as a significant opportunity for the pensions industry to transform savings outcomes for millions of people.

The FCA’s new approach is expected to have a substantial impact on the pension market, helping to ensure that all savers, regardless of their level of engagement, receive the best possible value for their retirement savings. By focusing on long-term value rather than just costs, the FCA hopes to foster a more competitive and effective pension market in the UK.