Workplace pension schemes could be rated with a traffic-light system under plans designed to help savers get the most out of their retirement savings.
About 16 million workers save for their retirement through defined contribution pension schemes where the income they ultimately receive depends on a range of factors, including the performance of the funds they are invested in and the charges.
Those who do not want to make decisions about where their money is invested rely on their workplace provider’s default scheme, and on other people making decisions about how their money is invested.
Under a framework proposed by the Financial Conduct Authority, the Department for Work and Pensions and the Pensions Regulator, these schemes would be compared on a range of publicised metrics demonstrating value.
They would then be publicly rated red, amber or green, with only green schemes representing value for money.
Schemes would be given an amber rating if regulators believe they can be improved to provide value within a reasonable period of time, and a red rating if they do not believe that’s possible.
Companies running red-rated schemes would be obliged to consider moving savers to an alternative arrangement that does provide value for money.
The consultation paper proposing the shake-up said it should lead to better value pensions, without savers having to take action.
It said value for money was not just focused on charges, as the cheapest schemes would not necessarily provide the best pensions in the long term. Focusing on value rather than costs would enable providers to invest in assets which could give greater long-term returns but have higher management costs, it said, such as infrastructure or venture capital.
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The pensions minister, Emma Reynolds, 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.
“Our Pension Bill and Pensions Review will make pensions fit for the future, and having an effective Value for Money framework will lay the foundations for this.”