Workplace pension schemes could be assessed on a traffic light system based on plans designed to help savers make the most of their retirement savings.
About 16 million workers save for retirement through defined-contribution pension plans, but the income they ultimately receive depends on a variety of factors, including the performance of the funds in which they are invested and fees.
People who don’t want to decide where their money is invested are reliant on their workplace provider’s default scheme and rely on others to decide how their money is invested.
Under the framework proposed by the Financial Conduct Authority, the Department for Work and Pensions and the Pensions Regulator, the schemes would be compared on a range of published indicators of value.
They are then officially rated red, yellow or green, with only the green schemes representing value for money.
If the regulator determines that a scheme can be improved to deliver value within a reasonable timeframe, it is given an amber rating; if it determines that this is not possible, the scheme is given a red rating.
There would be an obligation on those running red-rate schemes to consider transferring savers to cost-effective alternative schemes.
The consultation document proposing the reforms says pensions should become more valuable without savers taking any action.
The report said cost-effectiveness was not just about fees, as the cheapest schemes do not necessarily offer the best pensions in the long term. A focus on value rather than cost would allow for investments in assets that have the potential to deliver greater returns in the long term but which have higher management costs, such as infrastructure and venture capital.
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Pensions minister Emma Reynolds said: “More than £130 billion was saved into workplace pension schemes last year and we want that money to work hard to provide better retirement income for future pensioners.”
“Our pensions bill and pensions review will make pensions fit for the future and having an effective cost-effectiveness framework will provide the foundation for this.”
