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Workers will have greater scope to challenge employers to dump poorly performing company pension schemes, under regulatory changes aimed at “putting power” into the hands of retirement savers.
UK workers cannot choose the pension plan into which their monthly contributions are paid, which is not the case in many other countries. Instead, the employer chooses a retirement plan on behalf of the workforce.
There are concerns this system has led to a generation of workplace savers showing little interest in how their pension plan is performing.
A survey of 4,000 savers by Boring Money, the consumer website, found more than one in five did not know that the money in their workplace pension was actually invested — let alone what it was invested in.
Speaking at a pension industry conference in Manchester this week, Sarah Smart, chair of the Pensions Regulator, said reforms would help savers understand whether their employer had chosen a good scheme. These changes include a pensions dashboard, where retirement savings can be seen in one online hub, and a new benchmarking initiative showing how schemes rate on value for money.
“Once the pension dashboard is in place, savers have got to make a choice about what they do with all those different pots,” said Smart. “We want them to make that choice based on value for money.”
There are no current proposals to shake up the rules so that workers get to choose their own workplace pension provider, as employees in Australia do. Smart said this “was a matter for the government”.
But the regulator believes the reforms currently in train will enable savers to assess more easily the value of their workplace pension and to press their employer to shift to a better performing scheme.
“The shift that we are seeing now to putting power into the hands of the saver will progress,” Smart said.
The intervention comes as data shows a vast difference in performance by UK pension plans serving tens of millions of savers.
Corporate Adviser, a publication covering the pension sector, found in the year to the end of June the worst performing “default” pension fund returned just 1.82 per cent, compared with 13.1 per cent for the best performer.
The UK regulator has vowed to crack down on the poorest performing plans that fail a new value-for-money test, to be rolled out in the coming years.
While the regulator tackles the market, there have been calls for the rules to be loosened so savers are not penalised if they switch to a better-performing workplace plan. Currently, employers are not obliged to pay employee pension contributions into a scheme chosen by the worker.
Some experts believe that moving to an Australian system, where savers are free to choose their workplace scheme and providers compete for their business, has its drawbacks.
“One of the things with the Australian funds is with everyone competing with each other, the marketing costs are high,” said Sir Steve Webb, former pensions minister and partner with LCP, the pension consultancy. “Who pays for these costs? It is the member who pays.
“Actually, if we harness the power of the employer to deliver efficient, cost-effective pensions, we can do it much better than everyone fighting for Mrs Williams.”
