Demanding that value for money is a priority for independent governance committees is not an easy ask. Jack Jones explains why
Anyone reading the final rules set out by the Financial Conduct Authority for independent governance committees will have little doubt that value for money is at the top of their agenda.
The phrase pops up 85 times in the document and the watchdog states: “The primary purpose of an IGC is to act in the interests of scheme members in assessing and raising concerns about the value for money of the provider’s workplace personal pension schemes.”
But the FCA is yet to provide much guidance as to what it actually entails. It has acknowledged value means “different things for different people”, and the fact the regulator is not relying on charge caps to protect consumers shows that good value does not simply mean low cost.
But the lack of explicit guidance on what to measure, and how, means there is a great deal of variety in the first set of annual reports, published by IGCs in April. “If you look at this first generation of IGC chair statements, no two are going to look the same because we’ve all come at it in different ways,” says PTL director Richard Butcher, who chairs the Old Mutual Wealth IGC.
Some differences are immediately apparent. The report produced by Old Mutual’s committee is 16 pages in total, which is not atypical, but Standard Life’s IGC report is almost 50 pages long.
We wanted to make it clear what we had done, found and asked Standard Life to change”
Standard Life IGC chairman Rene Poisson says the reason his committee’s report contains so much detail is that the document is not just designed to be read by the firm’s 1.3 million policy holders.
“We expect the report to be read by diverse constituencies with different needs,” he says. “We wanted to make it clear what we had done, found and asked Standard Life to change. We found a version combining a member section and a more detailed version was the best way to meet these needs.”
But the two committees take quite similar views on how to measure value for money. Both have adopted the same framework, put together by a group of around half a dozen IGC chairs. This set of principles is designed to be applicable to all providers, from closed mutual funds, to long-established insurers, to freshly minted workplace schemes.
>>> VALUE-FOR-MONEY PRINCIPLES
- Value is more than just cost
- Assessing quality needs to consider all elements of the proposition that can materially affect member outcomes
- Assessing relevance needs to consider the needs of the member base and the extent to which these are reflected in the member feedback the IGC receives
- Assessing cost is primarily a relative assessment, with research and judgement required to assess what are equivalent comparators to use
- Value for money is forward-looking and can change over time
- Value for money is concerned with anticipated outcomes at retirement
- Cross subsidies inevitably exist within and between schemes
- Different contract designs can lead to different intermediate consequences, not all of which are in scope for IGCs
- Members’ interests include the stability and the ongoing existence of providers
- The profitability (or lack thereof) of a provider’s workplace pension proposition
This means the principles are very high level (see box above), including statements such as “value for money is forward looking and can change over time” and “value for money is concerned with anticipated outcomes at retirement”.
How each IGC interprets these principles will vary. Standard Life’s committee scores the firm’s products on a scale of zero to three in four areas – service quality, risk management, relevance and investment quality. These are then weighted (40% for investment quality, 20% for the other categories), combined, and considered in the context of the charges levied on members.
Prudential’s IGC uses simple benchmarks to assess value. It measures investment performance after charges against Consumer Prices Index +3%.
We would find it helpful for the regulator to be involved because we need some form of consensus”
Both IGCs found that their provider was offering decent value for money. But the lack of an agreed benchmark for indirect costs is clearly a frustration. Royal London’s report points out that these measures “require estimated data and could be misleading until a standard approach is agreed by the industry”.
It seems the industry is some way from achieving this, however, despite the best efforts of IGCs over the past year. Poisson believes the FCA needs to intervene. “We would find it helpful for the regulator to be involved because we need some form of consensus as to a) what is being benchmarked and b) how it’s being benchmarked,” he says. “In reality we need a single utility provider of the benchmark because there’s no point having providers benchmarking different people, each on a different basis.”
Without this regulatory direction it seems unlikely that any single benchmarking method or provider will get the grip on the market that is required. Until participation is mandatory, which provider would want to risk coming bottom of a list of high-quality offerings, while less good schemes decline to sign up or opt for a different standard?
Despite these gripes, IGCs point to plenty of early successes on charges and the treatment of legacy customers. Legal & General’s IGC has agreed a cap on annual management charges in cases where they would push charges above 1%. This will reduce member charges by 38 basis points on average.
There’s no point having providers benchmarking different people, each on a different basis”
Standard Life’s IGC has similarly negotiated down charges where they were over 1% previously, in a series of measures it says will benefit 145,593 current scheme members, and 69,659 former members.
Others report they have pushed their providers lower than they initially wanted to on exit charges. Old Mutual has capped these at 5% while Prudential has scrapped them altogether.
IGCs are also looking to push their remit where they think this is necessary. Standard Life’s has taken into account employer charges when assessing value for money, for example. This technically falls outside the definition of value for money, which is focused on fees borne by the member. But Poisson believes it is not helpful to compare a legacy product with a 1% member charge with one of the firm’s modern products for smaller employers – which have a 0.75% member charge with a monthly employer fee – without considering both types of charge.
He explains: “One of the questions we felt was important to answer in a value for- money context was whether the industry was milking the back book for profits against what they’re making today against modern charge-capped products.”
Perhaps surprisingly, the IGC found that in 80% of cases, the modern charging structure actually proved more profitable, because of the large number of small pots among the legacy policies.
It remains to be seen what the FCA will make of developments like this, and the industry will be watching for feedback on this first round of annual reports with interest. But if IGCs are to play the role the watchdog wants in holding providers to account, it needs to get a move on.