The UK will set out plans to introduce a value-for-money test for pension funds, aiming to improve disclosure standards, drive better outcomes for pension savers and boost economic growth.
The measures, to be announced on Monday as part of a wider policy package, mean pension plans and their trustees are forced to declare, assess and compare the value of the money they provide.
However, ministers said the initiative would require a “cultural shift” in the UK workplace pensions market, which focuses on low costs rather than value and investment.
Currently, employers choosing a pension scheme for their staff cannot easily research and compare the available options. Schemes that fail to meet the planned value test must improve or may be forced to terminate or merge with better ones.
“Since 2012, ‘auto-enrolment’ has changed the pensions landscape in the UK for the better, but we know there is more to do to ensure a fairer future for savers,” said Laura Trott, the pensions minister, in an interview with the Financial Times .
“The ‘Value for money framework’ and our new measures will increase security and make better returns for savers, so they can enjoy the retirement they have worked so hard for,” he added.
Trott added that poor pension schemes could cause people to lose thousands of pounds.
The proposals come amid a wider pension shake-up, also to be announced on Monday, aimed at making the UK’s “defined contribution” pension scheme used by more than 10 million savers fairer and more “predictable and adequate”.
other initiatives include proposals for savers to consolidate the old pension pot, and negotiations progressing new collective style pension plans, which have the potential to provide a higher and more stable income for many retirees.
In the plan defined in the consultation, the scheme will be required to publicize investment performance, costs and expenses and service quality through clear and comparable metrics that will be announced.
Arguing for a cap on workplace pension costs in 2013, the coalition government cited analysis that the cost of “standard” popular pension funds was “more significant” than the investment strategy in determining savings results.
“I don’t think that cost is the be all and end all,” said Trott.
“The important thing . . . is the person receiving the pension. What matters to them is whether they have a decent pension that will provide them with the standard of living they want in retirement, and their return will be the most important thing to them.
He added: “We are not saying that the costs are negligible.”
The shock comes alongside a wider government effort 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 usually dominated by equities, bonds and other assets that are more easily traded.
Last week, Jeremy Hunt, the chancellor, said there was a “critical need” for easier access to capital to help rebuild the economy.
Trustees of pension funds have a duty to act in the best interest of their members, with higher fees and performance costs often associated with illiquid investments that appear to be a barrier to cash steering schemes into the sector.
A removal of performance fees of 0.75 percent of the calculation of the charge cap, and other reforms, aimed at boosting investment plans in the so-called illiquid.
“What we call illiquid is that it encourages higher yields,” Trott said.
“But nobody is forcing pension funds to try and invest in these things, which is very important. They have to act in the best interests of pensioners. So nudge them in that direction . . . to see higher returns.” “
The consultation on the value for money plan ran for eight weeks, closing at the end of March.