With the vast majority of employed people now enrolled in a workplace pension thanks to auto-enrolment, there is welcome news from the Financial Conduct Authority, which has revealed a new framework to monitor the performance of these schemes.
Focussing on defined contribution pension schemes – which most workplace pension schemes in the private sector now are – the new framework will work on a publicly available ‘traffic light’ system, assessing schemes for things like costs and charges, service quality and investment performance. The new framework will also take into account past investment performance, quality of communications and administrative competence.
Those rated ‘amber’ will be required to demonstrate improved performance, while those rated ‘red’ could be closed altogether and consolidated into better-performing schemes.
There are 16 million people now enrolled into workplace defined contribution pensions, so this new framework is a big deal. Currently it is much more difficult to measure the performance of a workplace pension than, for example, a self-invested personal pension (SIPP). And most workplace pensions are not like private pensions, where the holder can elect to transfer their pension savings elsewhere if they are not satisfied with their provider.
It is fair to say that the majority of workplace pension schemes are well-managed, with significant oversight and transparent charging structures. But this new framework will allow all scheme members to have information about the performance of their pension scheme, and to know that if that performance is below-par, the FCA will take steps to rectify the situation.
The FCA says it will focus on long-term value as well as cost and charges. Although there is unlikely to be a significant short-term effect, in the longer term it could improve pension outcomes for millions of people.
At a time when the future of the state pension is far from set in stone, it is vital that the money people save during their working lives gives them the best chance of enjoying a comfortable retirement – and this new framework is a step in the right direction towards achieving that.
