Britain plans traffic light system to end poor-value pensions

By Huw Jones

LONDON (Reuters) - Britain's markets watchdog proposed a traffic light system on Wednesday showing savers how much value for money they get from their pension, with laggards possibly having their assets moved to a better performing plan if a red light flashes.

The newly elected Labour government wants plans to perform better for savers, and to build up bigger pots for plugging the cash-strapped country's investment gap in UK infrastructure and growth companies under the so-called Mansion House Compact.

"Poorly performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes," the Financial Conduct Authority said in a statement.

It proposed a 'value for money' framework that defined contribution (DC) pensions, the most common form of pension, would have to comply with.

"Schemes will be compared on public metrics that demonstrate value – not just costs and charges, but also investment performance, and service quality," the FCA said.

"They would, once the final framework is decided, be publicly rated red, amber or green."

The government plans to legislate for the framework to be extended across the pensions market, as part of a sector review.

Finance Minister Rachel Reeves urged pension schemes on Wednesday to continue "backing Britain", and to consolidate so they can invest more in productive assets.

The FCA said that by consulting now on DC pension schemes, which have 16 million savers, it means that future change can be accelerated across the system when the government's pensions legislation is ready.

The Investment Association, which represents asset managers, said the new framework is a "huge opportunity to improve the workplace pensions landscape" by expanding the investment opportunities open to schemes.

The FCA said that focusing on value, rather than costs, will allow schemes to invest in assets for greater long-term returns, but have higher management costs, such as infrastructure and venture capital.

The proposals also include mandatory end of calendar year disclosure on type and geographical location of assets that schemes invest in, as the government seeks to increase pressure to put more cash in UK-based assets.

The rules could restructure the sector.

"We expect that greater transparency will prompt some providers to consider if they have the scale and allocations to deliver good value," said Sarah Pritchard, the FCA's executive director of markets and international.

(Reporting by Huw Jones, Editing by William Maclean)