FCA to Prevent Underperforming Pension Schemes from Taking on New Clients

The Financial Conduct Authority (FCA) has proposed new measures that could see poorly performing workplace pension schemes barred from accepting new clients and potentially forced to close.

In a consultation paper published on 8^th August 2024, the regulator suggested that workplace pension schemes should be required to issue an annual value-for-money statement. This would enable independent governance committees to publicly compare these schemes using various metrics, including costs, charges, investment performance, and service quality.

Each scheme would be assigned a red, amber, or green rating based on these assessments. Those receiving a red or amber rating would be immediately prohibited from accepting new clients, and an improvement plan would be required to be submitted to the FCA.

The consultation stated, “We do not expect firms to accept workplace pension business from new employers on terms that do not provide value for savers. Doing so would not align with the firm’s obligations under the Consumer Duty.”

The FCA also proposed a rule that would prevent firms from accepting business from new employers if the arrangement is rated amber or red. Underperforming schemes would be given three years to improve their performance. Should they fail to show improvement by the fourth year, they would be required either to transfer members out or to reduce fees.

However, some experts have criticised the FCA’s measures, warning of a potential ‘herding’ effect, where firms might avoid risks to ensure they do not lose the ability to take on new business for a year. This could lead to a situation where firms aim for mediocrity, confident that avoiding risk reduces the chances of a severe impact.

Steve Webb, a partner at pension consultancy LCP, expressed concerns that the measures might discourage master trusts from pursuing bold strategies due to the fear of not achieving a green rating. “Large master trusts will be terrified of anything other than a green rating,” Webb said. “Even an amber rating means you can’t do business for a year. Sales teams actively seeking new business will be stymied, and there will be a significant push to avoid anything less than green.”

There had been anticipation that schemes might be allowed to use future performance data to justify investing in riskier assets. However, the FCA clarified that it would rely solely on “factual, historical data” when assessing firms.

Tom McPhail, director of public affairs at The Lang Cat, described the proposals as “disappointing,” arguing that an opportunity had been missed to “develop an innovative approach to investment decision-making.”

HT Legal Opinion: It is notable that Occupational Pension Schemes are regulated not by the FCA but by the Department for Work and Pensions (DWP). Complaints about these schemes are handled by The Pensions Ombudsman and, since they are not under FCA regulation, they are not covered by the Financial Services Compensation Scheme (FSCS). However, it is reassuring to see the FCA taking steps to address unfair practices in Occupational Pensions, acknowledging that employees are still consumers who deserve the same standards in their workplace pensions as they do in their private pensions.