These changes come in the wake of growing concerns over the transparency and value of pension schemes, with many savers uncertain about whether their funds are working hard enough to support them in later life. According to the Financial Conduct Authority (FCA), the aim of the overhaul is to empower pension savers, enabling them to make more informed decisions about their financial future.
Improved Transparency for Pension Savers
The core of the reform is a new, simplified way to present pension scheme performance. According to the UK government’s proposal, pension schemes will be rated using a colour-coded system: dark green for strong performance, light green for good value, amber for areas needing improvement, and red for poor value. This system is intended to provide an easy way for savers to compare different pension schemes and make more informed decisions.
The move is expected to have a significant impact, particularly for those with defined contribution pensions. According to a joint announcement by the Department for Work and Pensions, the FCA, and The Pensions Regulator (TPR), pension pots in poorly performing schemes can show relatively low growth, while those in high-performing schemes could see much better returns. For example, a £10,000 pension pot could grow to just £10,400 in a poorly performing scheme but could rise to £15,100 in a well-managed one over five years, a 46% difference in growth.
The traffic light system will also provide a clear message about the value for money that schemes offer. As FCA Deputy Chief Executive Sarah Pritchard noted, good value isn’t simply about low costs, but also includes strong performance, good service, and transparency. This new level of transparency aims to empower savers to seek out better schemes or demand improvements from their current providers.
Governance Reforms: Holding Poor-Performing Schemes Accountable
Alongside the new rating system, the government is introducing tougher governance measures aimed at improving pension scheme performance. Under the new framework, pension schemes that fall into the red category (indicating poor value) will be required to either improve their performance or move savers into better-performing alternatives. This change aims to encourage underperforming pension providers to either raise their standards or exit the market altogether, ensuring that savers aren’t stuck with poor returns.
According to Nausicaa Delfas, CEO of TPR, the changes are crucial for ensuring that millions of people who rely on their pensions for later life receive value for their money. The aim is not just to help individuals but also to create a more efficient and competitive pension market overall. Trustees will be expected to act on the feedback provided by the new system and take action when necessary, which could include closing schemes to new members or transitioning existing savers to higher-performing schemes.
This overhaul could also help reduce confusion for the millions of people with defined contribution pensions, making it easier for them to track the performance of their savings. The Minister for Pensions, Torsten Bell, emphasised that the current system is often too opaque, leaving savers unsure whether their money is working for them. The new measures are designed to ensure greater clarity, which will be critical as the UK continues to grapple with an ageing population and increasing reliance on personal pensions for retirement security.
The consultation on these reforms is set to remain open until March 8, 2026, and any final rules will be based on the feedback received. These changes, if implemented, have the potential to significantly improve retirement savings for millions of workers and set a new standard for pension transparency and governance across the UK.
