Dogged by criticism over their lack of independence and powers, new watchdogs for workplace pensions have published their first reviews into provider practices.
Ahead of the reports being published, insurers moved to slash exit penalties and update poor-value legacy products. But how much credit can the new independent governance committees take for changing behaviour?
Are the bodies going far enough, or have they been too lenient on the firms that ultimately pay their wages? And how close have they come to their ultimate aim to measure value for money?
Money Marketing takes an in-depth look at the reports published to date to examine whether some of the biggest names in pensions are providing bang for the members’ buck.
Value for money?
The first wave of IGC reports into workplace pensions has been given a mixed reception.
While cuts to early exit penalties on legacy pension products have been welcomed, critics point to the failure to produce a standard measure of “value for money” – the key metric IGCs are supposed to work to.
Comparison is made harder by the huge variation across the industry. Zurich’s IGC report numbers just eight pages compared with Standard Life’s 46-page document.
The committees have been in place since April following the Office of Fair Trading’s damning report into the workplace pension market. They were given a 12-month deadline to produce their first annual statements.
The first task handed to the committees by the regulator was an audit of legacy schemes and charges, as well as a broader assessment of workplace schemes. But experts say the Government and the FCA need to step in to develop an industry standard to measure value for money.
Prudential’s IGC is the first to suggest a hard benchmark to assess value. It will measure fund performance against CPI inflation plus 3 per cent a year after charges over a “sustained period”. On charges, it will measure auto-enrolment schemes against a management charge of 0.75 percent and non-auto-enrolment products against 1 per cent. There is also a 1.25 per cent benchmark for with-profits investments.
Standard Life’s IGC gave a score of between zero and three for areas such as investment quality, member engagement and service levels.
But Standard Life IGC chair René Poisson says: “We spent considerable time working on benchmarking, both within the committee and the other IGCs chairs. I had several meetings with third-party benchmarking providers to see whether we could get a cross-industry benchmark. My conclusion is unless the FCA is prepared to assist by mandating providers to engage, it will be very difficult.
“There is no incentive for anyone to participate unless everyone is mandated to be involved. Otherwise the risk is, say, three firms agree to the benchmark and one has to come bottom of the three despite being better than the rest of the industry.
“We need regulatory clarity on some of these issues. This year has been about setting a baseline and there is plenty of work to do.”
Pension Playpen founder Henry Tapper says the Government has failed to define value and to force investment managers to disclose transaction costs.
He says: “We need a common standard formula of what value for money is and how we assess it: a red, orange or green system across the board based on whether a life company is delivering, broken down into legacy and ongoing products.
“There is a failure so far to agree to this. That’s not entirely the fault of the IGCs, it’s largely the fault of the Government – they haven’t followed through on the promise to define value for money. We just do not know what exactly people are paying for workplace pensions.”
In February, Money Marketing revealed how the delay to European regulations Mifid II and Priips meant IGCs would have to produce their reports without full oversight of investment management costs.
This lack of common standards led to Royal London’s IGC issuing its only red warning in its assessment of value for money.
The wins and the losses
Most committees have already achieved concessions from their providers. Royal London, for instance, has made changes to policy and exit fees and will extend loyalty bonuses which will cost it £15m in lower charges.
Prudential’s IGC has secured a cut in charges across schemes, including those out of the IGC’s remit. As a result, charges, including for auto-enrolment schemes, are set to drop from an average of 1.2 per cent to 0.92 per cent.
“The Government has not followed through on the promise to define value for money. We just do not know what exactly people are paying for workplace pensions.”
Standard Life’s committee has negotiated a cut in charges that mean none of the around 180,000 customers, or 90,000 paid-up members, will pay charges of more than 1 per cent. Exit penalties on both workplace and individual member policies will also be capped at 5 per cent.
An FCA consultation on enforcing a cap on exit fees is yet to be published.
Poisson says: “One area where we could have gone further was on exit charges. Standard Life made the fair point they have a much lower set of exit charges than the rest of the industry but they didn’t want us to beat them up where they were better than the industry. We agreed a cap of 5 per cent or lower if the FCA comes in below.”
But not all providers have had cosy relations. Legal & General’s committee secured a 1 per cent cap on non auto-enrolment scheme charges but no agreement was reached on exit fees. The committee said it was “disappointed at the time it has taken to provide the IGC with meaningful management information”.
Both L&G and Standard Life’s IGCs found resistance when recommending moving old policies to more competitive modern products.
L&G IGC chair Paul Trickett suggests a “wholesale transfer” to new products may be in the best interests of the majority of members.
The report adds: “There have been, in the opinion of the IGC, opportunities for L&G to lead the way in encouraging the right value for money approach across the industry and these opportunities were not taken, despite challenge from the IGC.
“We understand there are commercial sensitivities that need to be considered but sometimes these need to be disregarded in the interest of the member.”
The Standard Life IGC raises the alarm over historic default investment strategies that “either do not have a lifestyle design or have a design which remains targeted at annuity purchase despite the introduction of the pension freedoms”.
But the provider says older contracts “do not allow Standard Life to take investment decisions (either redirecting future contributions or switching existing funds) on members’ behalf.” It adds: “We are in agreement this action will be in the best interests of the majority of members so we are engaging with the FCA and the Department for Work and Pensions to find a solution.”
FCA rules state IGCs must have a minimum of five members, with the chair and a majority being independent. However, all members are appointed by the insurer and some members sit on the committees of multiple firms. Consumer groups called for IGCs to have 100 per cent independent members and for third parties to decide appointments.
PTL managing director Richard Butcher sits on the Standard Life and Old Mutual Wealth IGCs as well as a governance advisory arrangement that oversees the products of 14 insurers.
He has hit back at claims working across several insurers is a problem.
He says: “I fail to see how there can be a conflict of interest. It works for the public, the regulator and the Government if we act in a consistent way. If you have people with multiple appointments you are more likely to get consistency emerging.
“It makes the whole process more efficient. Instead of having the same debate at each IGC you only have to have it two or three times. The only potential conflict of interest, and it’s not really one for consumers to worry about, would be if one of us gave an insurer’s intellectual property to one of their competitors.
“If that happened it would be obvious and I would lose the job and every other IGC appointment we had because no one would trust us.”
Poisson says: “My IGC is not a group of industry patsies. Yes, they pay us but that is the same case as with trustees. You have to make a decision as to whether the individuals have sufficient backbone and personal pride not to be rolled over.”
He adds the regulator was right to allow insurers to appoint their own staff members to committees.
“In our committee, the Standard Life representative led us to things we subsequently asked to change. It would have been very hard to start entirely from scratch without any inside knowledge and to get as far as we have got this year.”
Consumer champions or rubber-stamp merchants?
The “independent” governance committees are releasing their first annual reports. So are these demonstrating the kind of action you would expect from robust champions of customers’ interests, or more of the same from the usual suspects of industry insiders and rubber-stamp merchants?
There were some welcome changes to charges, such as eliminating paid-up fees which could have a particular impact on small pots. There was also some removal of exit charges, although in some cases it appeared penalties of up to 5 per cent could still be charged, with higher charges for those younger than 55.
Too many of the IGCs seemed to have uncritically accepted the benchmark of value for money of 1 per cent annual charges mentioned in the OFT report, without much rationale behind this. It was also not clear the extent to which providers had complied with the charge cap on new savings, but left some of their customers’ existing pensions languishing in higher-charging old-style products. One IGC seemed too quick to accept the provider’s claim its contracts did not allow it to switch investments from old-style default arrangements. They should have commissioned independent legal advice.
There was also a gaping hole in some IGCs’ assessments of value for money as they failed to consider retirement income and annuities. While most of the reports talked about pension freedoms, there was very little on levels of drawdown charges and no IGCs seemed to be monitoring whether providers offered competitive annuity rates or comprehensive ranges of enhanced annuities. Assessments of transaction costs were also of variable quality. Some had not tried yet, others had tried but had found the information difficult to get. What these reports do highlight is a strong need for a regulatory requirement on fund managers to disclose transaction costs and to answer questions from IGCs and trustees.
It is clear some IGCs have tried, but there is still a great deal of work to do. I also cannot help but feel the committees would have been more effective if membership was more diverse and more providers looked beyond the standard profile of a retired actuary, insurance company executive or an investment banker.
Dominic Lindley is an independent consultant and former Which? financial services team leader