Modern-day pension schemes will be allowed to use forward-looking assumptions to assess whether they are offering good value for money to their members in a major tweak to government proposals.
Experts warned that the new freedoms could enable schemes to flatter their performance scores in order to escape being deemed poor value for money and forced to transfer members to better performing schemes.
Supporters of the new proposals said it would mean that schemes would not be penalised for diverting more client money into asset types like private equity which, while costing more in fees, would produce potentially higher returns and therefore bigger ultimate pensions.
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The changes are to the framework affecting 16 million members of defined contribution (DC) schemes with more than 1,000 members and part of plans by the government to force schemes to be much clearer on whether they are offering value for money.
Torsten Bell, the pensions minister, said the proposed new “traffic light” system would tell savers instantly whether they were getting good value and would force schemes to be straight with people.
“It is simply too difficult for people to know whether their pension savings are working for them. That’s not right when we’re talking about something as important as people’s security in retirement.”
But in a change to the original proposals, regulators are now saying schemes can assess themselves according to forward-looking projections of their expected returns ten years into the future as well as backward-looking numbers like past actual performance numbers.
Torsten Bell, the pensions minister, said a new “traffic light” system would tell savers immediately about the value they were getting
MARK THOMAS/ALAMY
Tom McPhail, an independent pensions consultant and Times columnist, said the upside was that it would allow schemes to be more adventurous in asset choice but there was a danger of setting up “unrealistic expectations”. There would need to be robust safeguards, he said.
The Financial Conduct Authority conceded that some critics regarded forward-looking measures as “too unreliable, encourage gaming and are too complex”. But a greater number of respondents were supportive.
The traffic light system — a scoring arrangement akin to that imposed on the food industry — has also been changed from a choice of red, amber or green to a four-colour spectrum of red, amber, light green and dark green.
A spokesperson for the FCA said the change would allow the top performers to be more easily identified and would not allow more schemes to escape being dubbed poor value.
Schemes scored red or amber will be required to commit to improve or transfer members to better performing schemes. The aim is to encourage more consolidation of smaller schemes to harness scale economies.
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The framework only applies to DC schemes, not traditional defined benefit schemes, where pensions are guaranteed regardless of investment performance.
Philip Smith, a director at workplace pensions master trust TPT Retirement Solutions, said the proposals would lead to increased scrutiny of scheme performance and help employers move away from “cost-dominated provider selection”.
The FCA said: “Overall, there was support for forward-looking metrics. However, we recognise the challenges and proposed ways to manage the risk of unrealistic projections. As with the other elements of the consultation, we’re open to feedback.”