Workplace pensions to be rated red, amber or green

Twelve years on from the launch of auto enrolment, a new traffic light-style rating system for workplace pension schemes aims to deliver better value for savers.

Under the proposal, workplace defined contribution schemes will be compared on metrics that demonstrate value -- not just costs and charges, but also investment performance and service quality. They will then be publicly rated red, amber or green.

Poorly performing schemes will be required to improve or transfer savers to better schemes. This is expected to lead to better value pensions, without savers themselves having to take action.

Long-term value

The proposal comes from the Financial Conduct Authority (FCA), the Department for Work and Pensions and the Pensions Regulator as part of a joint framework designed to shift the focus from costs to long-term value, and ultimately deliver better retirement savings.

The framework will be used by pension providers and those making decisions on behalf of savers to provide greater transparency over how schemes are performing.

In addition to driving up standards, the FCA hopes to see increased investment from UK pension schemes into national infrastructure projects such as green energy, house building and transport.

"Focusing on value rather than costs will enable providers to invest in assets which could deliver greater long-term returns but have higher management costs, such as infrastructure or venture capital," the regulator explained.

An industry consultation on the proposed framework is open until 17 October.

The consultation document states: "We are clear that value for money is not only about a focus on costs and charges -- the cheapest schemes to run will not necessarily deliver the best performance in the long term for consumers.

"Other factors are relevant including the quality of services provided, investment performance and customer experience."

The document notes that over 90% of workplace pension savers are invested in their scheme's default strategy.

Workplace pension participation

According to the latest data, 88% of eligible employees and 80% of all employees were saving into a workplace pension in 2023.

Total annual workplace pension savings for eligible savers amounted to £131.8bn.

Overall in 2023, contributions by employees accounted for 26% of saving, with employer contributions representing 64% and the rest coming from income tax relief on the employee contribution.

Better retirement incomes

"Sixteen million people save for their retirement into defined contribution pension schemes," said Sarah Pritchard, executive director of markets and international at the FCA. "We're working with the government and the Pensions Regulator to help them get better returns."

Emma Reynolds, Minister for Pensions, said: "Last year, over £130bn was saved into workplace pension schemes -- money which we want to see working hard for future pensioners to give them better retirement incomes."

Reynolds added that the value for money framework will help make pensions "fit for the future".