The UK is to set out plans to introduce value-for-money tests for pensions funds, aimed at raising disclosure standards, driving better outcomes for retirement savers and boosting economic growth.
The measures, to be unveiled on Monday as part of a wider package of policies, will mean that the pension plans and trustees concerned are forced to disclose, assess and compare the value for money that their arrangements provide.
However, ministers say the initiative will require a “cultural shift” in the UK workplace pensions market, which is focused on low charges rather than overall value and investment returns.
Currently, employers choosing a pension scheme for their staff cannot easily scrutinise and compare the options available. Schemes that fail to meet the planned value tests will need to improve or potentially be forced to wind up or merge with those that are better performing.
“Since 2012, ‘automatic enrolment’ has transformed the pensions landscape in the UK for the better but we know there’s more to be done to ensure a fairer future for savers,” said Laura Trott, pensions minister, in an interview with the Financial Times.
“The ‘value for money framework’ and our new measures will improve security and create better returns for savers, so they can enjoy the retirement they’ve worked so hard for,” she added.
Trott added that underperforming pension schemes can lead to someone missing out on thousands of pounds.
The proposals are at the centre of a wider pension shake-up, also to be unveiled on Monday, aimed at making UK “defined contribution” pension plans used by more than 10mn savers fairer and more “predictable and adequate”.
Other initiatives include proposals to help savers consolidate old pension pots, and a consultation progressing newer collective-style pension plans, which have the potential to provide higher and more stable incomes for many retirees.
Under the plans set out in a consultation, schemes will be required to disclose their investment performance, costs and charges and quality of service via clear and comparable metrics that will be made public.
Arguing for a workplace pension charge cap in 2013, the coalition government cited analysis that charges on popular pension “default” funds “were more significant” than investment strategy in determining saving outcomes.
“I don’t think that charges are the be all and end all,” said Trott.
“What is important . . . is the person who’s receiving that pension. What will matter to them is whether they have a decent pension which is going to provide them the standard of living that they want in retirement, and returns are going to be the thing which is most important to them.”
She added: “We are not saying costs are negligible.”
The shake-up comes alongside wider government efforts to unlock billions of pounds held in UK private pensions to help the economy and meet green targets, by encouraging investment in areas such as infrastructure, wind farms and innovative start-ups.
These “illiquid” investments are not widely held by defined contribution plans, whose portfolios are typically dominated by listed equities, bonds and other more easily traded assets.
Last week Jeremy Hunt, chancellor, said there was a “critical need” for easier access to capital to help rebuild the economy.
Pension fund trustees have a duty to act in the best interests of their members, with the higher charges and performance fees often associated with illiquid investments seen as a barrier to schemes steering cash into these sectors.
A removal of performance fees from the 0.75 per cent charge cap calculations, and other reforms, are aimed at boosting scheme investment in so-called illiquids.
“What illiquids is about is encouraging those higher returns,” said Trott.
“But nobody’s forcing pension funds to try and invest in these things, that’s really important. They’ve got to act in the best interest of the people with pensions. So it’s a nudge in that direction . . . to look at those higher returns.”
The consultation on the value-for-money plans runs for eight weeks, closing at the end of March.
