Pensions 'Value' shake-up could be extended to SIPPs

Government and pensions regulators could force 'poor value' workplace pension schemes to close in a major shake up which could eventually be extended to SIPPs, according to one provider. A new 'Value for Money' pensions framework was announced this week and includes a 'traffic light-based' red, amber and green value rating system for schemes. The colours will highlights good and poor value among schemes. Pensions with a poor rating will be encouraged to improve their value to pension savers or potentially be asked to transfer members to a better value scheme and then exit the market. The plan is backed by the Government, FCA, TPR (The Pensions Regulator) and the DWP. While the plans, open for consultation until October, will initially target Defined Contribution plans, platform and SIPP provider Hargreaves Lansdown predicts the initiative could eventually be extended to SIPPs and income drawdown plans. Backers believe that the new Value for Money Framework will benefit pension savers by, "shifting the focus from costs to long term value." The FCA says the aim is to “deliver better value retirement savings.” The FCA, DWP and TPR plan to implement a joint framework for workplace defined contribution schemes so that all regulated schemes are covered. The framework will be aimed at pension providers and, “those making decisions on behalf of savers” to provide greater transparency over how schemes are performing. Schemes will be compared on public metrics that demonstrate value and not just costs and charges but also investment performance and service quality. Once the final framework is decided schemes would be publicly rated red, amber or green. The FCA says that poorly performing schemes will be required to improve, or “ultimately protect savers by transferring them to better schemes.” This will open a path to curbing or closing down poorly performing schemes. The FCA says its proposals also support its secondary growth and competitiveness objective and that 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. Sarah Pritchard, executive director of markets and international at the FCA, said the focus will be on giving pension savers better value. She said: “16 million people save for their retirement into defined contribution pension schemes. We’re working with the government and the Pensions Regulator to help them get better returns. “We want to see a focus on long-term value, not just costs and charges. Given the impact these changes could have we are consulting now to ensure that the pension system can be ready to go when the legislative changes that need to happen are ready.” Pensions Minister Emma Reynolds MP 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. "I would encourage responses from across the industry, including trust-based schemes, to this consultation.” Nausicaa Delfas, chief executive of The Pensions Regulator, said: “We want every pension saver to get value for money from their pensions. That means good investment returns, and high-quality services, for a competitive price. This is a great opportunity for the pensions industry to help to transform pension saving for millions, and to deliver greater value for their retirement.” The FCA is seeking feedback on the framework which it says is one of a number of joint initiatives to deliver better outcomes for pension savers, including the Advice Guidance Boundary Review and the Pensions Dashboard. The Value for Money Framework proposals (CP 23/4) was initially published in January 2023 and has been picked up by the new Labour administration. Industry reaction to the plan has been broadly positive but some have warned of “unintended consequences.” Laura Myers, partner and head of DC at pensions consultant LCP, said: "We have long advocated a change in emphasis from cost to overall value, so the new focus of the VFM framework on a wider range of measures of value is welcome. “But there are a number of risks with the new approach. One is that high quality schemes run by individual employers, often with the benefit of an employer subsidy, may not score highly in the eyes of the government compared with giant master trusts, even if member outcomes could be as good if not better. “It is important that the government does not focus on size for size’s sake. There is also a risk that schemes will be so afraid of even an ‘amber’ rating that they will be more risk-averse and afraid of being outliers. This could lead to ‘herding’ of investment strategies rather than rewarding schemes which are willing to innovate and invest for the long-term. In short, there is a risk of the law of unintended consequences coming into play with this consultation.” Clare Stinton, head of workplace savings analysis, Hargreaves Lansdown, said: “The FCA has issued a red alert to pension providers not offering value for money and supporting the long-term interests of their members. “The Value for Money framework sees providers and decision makers become the green shining light that can guide millions to a brighter retirement. This will be done through a greater focus on default investment returns, costs and service.” Jamie Jenkins, director of policy at Royal London, said: “This is a welcome development for workplace pensions and should start to redress the balance between price and value, which has become overly focused on the former. There are certainly lessons to be learnt from a similar initiative in Australia but, with a sensible implementation approach, this could be a very valuable exercise in building on the success of automatic enrolment.” FS23/3: Government-regulator response to ‘Value for Money: A framework on metrics, standards and disclosures’.

Pensions 'Value' shake-up could be extended to SIPPs

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