Pension schemes will be publicly rated red, amber or green to provide savers with greater transparency on the performance of funds, under new rules proposed by the City regulator.
The plans will see schemes rated publicly on a range of metrics, including investment performance and service quality, rather than just focusing on costs and charges.
This should enable funds to invest in assets which could deliver higher returns but which also have higher management costs, such as venture capital and infrastructure.
The Financial Conduct Authority (FCA) said this would also mean that savers see higher returns.
Over time, the regulator expects to see the gap between the worse-performing schemes and the market average narrow due to competitive pressures.
“Poorly performing schemes will be required to improve or ultimately protect savers by transferring them to better schemes,” the FCA said in a statement.
The FCA noted its proposals supported its growth and competitiveness objective, mandated by the previous government in the Financial Services and Markets Act.
Sarah Pritchard, executive director of markets and international at the FCA, said: “16m 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”.
Similarly, Emma Reynolds, the new pensions minister, said that she wanted to see pensioners’ savings “working hard” to ensure better retirement outcomes. Firms will have until 17 October to consult on the proposals.
The announcement forms part of the government’s wider push to reform the pension landscape, following in the footsteps of the previous government.
The King’s Speech included a Pensions Bill, which seeks to drive investment into the domestic economy and secure better outcomes for pensioners. Rachel Reeves has already announced plans to force fragmented local government pension schemes to combine in a single fund.