The issue of pension scheme governance has risen up the policy agenda dramatically in recent years driven primarily by the establishment and expansion of auto-enrolment.
The extra scrutiny involved has seen both the Pensions Regulator and the Financial Conduct Authority making increasing and increasingly frequent demands regarding scheme governance.
The latest chapter in the history of governance can arguably be dated to a report from the now defunct Office of Fair Trading’s market study of workplace schemes in 2013.
The OFT report highlighted weaknesses in the demand side of pensions. It also had concerns across the board covering both trust- and contract-based pensions including, variously, the independence of master trusts from providers, the governance standards at single employer trusts and the lack of clear governance regarding contract-based schemes although especially those generally on offer to smaller employers.
Even in 2013, the study noted the agreement not just of the Department for Work and Pensions but the willingness of the Association of British Insurers to create independent governance committees, then formalised as a requirement by the Financial Conduct Authority in April 2015.
Those rules required that IGCs assess the ongoing value for money of workplace personal pension schemes; act solely in the interests of relevant scheme members; raise any concerns with the provider’s board; escalate their concerns to us (The FCA), if necessary; and report annually on what they have done.
In the case of master trusts, a House of Commons Library research paper published in 2018 suggested that post auto-enrolment, policymakers reached a consensus view that rules generally intended for single employer schemes needed updating to take account of multiple employer-schemes.
A new system was legislated for in the Pension Schemes Act 2017 and implemented late last year.
This, combined with 2016’s governance code 13 for trust- based schemes more generally, has seen a substantial increase in the governance requirements. Arguably the most dramatic result is that in 2019, master trusts must now be authorised by TPR.
Pension experts see successes from both arrangements.
Discussing IGCs first, Mercer director of consulting Brian Henderson says: “IGCs seem to have done the things you would have hoped they would do. They have tackled charges with some success. They have had success with exit charges. I have seen evidence of those coming down from 5 per cent to 1 per cent or lower, so there are some positive strides.
“If you went back to the start, back to the first reports and compared them with now, you would see they have done a lot in comparison.”
Turning to master trusts, he says they have upped their game in response to regulation.
“We are seeing trustees showing their teeth. So, I am reasonably positive about both. The new authorisation is very demanding and bringing lots of rigour.”
Hargreaves Lansdown senior analyst Nathan Long echoes the point about legacy schemes. He says: “IGCs have so far been pretty effective within a tight remit of ensuring value for money when building up a pension pot. They’ve been particularly successful at reducing charges on legacy plans, which is important as it brings them closer in line with many of the modern, well managed and competitively priced workplace pensions. The elephant in the room is still how they properly measure value for money, as it encompasses so many different areas of the provider’s service.”
PTL managing director Richard Butcher says: “IGCs are really a new concept. They are learning on the job at little. Are they the finished article? No. But they definitely have been improving value for members.”
Butcher says he does not believe that a standard template has emerged, and he remains unconvinced that it is needed.
“There is a debate around whether there should be a standard definition of value for money for members to allow people to compare apples with apples. The difficulty with that approach is if you hard define the metrics then it gets easier to game them.
“If the insurers are told to review their default investment strategy four times a year, then they will review it four times a year. But what does review mean?
“It is not necessarily a measure of quality. It may be a measure of quantity. But if you don’t hard define it, and you leave to the discretion of a bunch of independently minded individuals, it is harder to game it. You may get better outcomes albeit less comparable ones.”
Others disagree. Age Wage chief executive Henry Tapper says we are still a long way from something effective on value for money. He points to a recent work and pensions select committee report and even the original OFT work.
“Basically, Frank Field’s work and pensions committee says we need a single definition of value for money that people get. That was really what the OFT wanted too, when it set the IGCs up.
“The IGCs keep going on about metrics. Red, orange, green. ‘Do we, in our opinion, think the scheme is doing a good job?’ It’s the same for master trusts. It’s subjective stuff. It is putting your finger in the air. Haven’t we got something more quantitative and quantifiable. Are we getting value for money? Yes or no?”
Indeed, he says the IGCs were told as when they researched what members wanted – what members wanted was how much money they got out relative to what they’d put in.
“People won’t take the IGCs seriously until IGCs start talking to them about what outcomes they are getting from these workplace pensions they are supposed to be supervising. Apart from Prudential, none of them have a benchmark for what is value for money. And, when it comes to what is going on in the member’s pot there is very ittle analysis,” he adds.
While the debate about value continues, questions are also frequently asked about the independence of boards and their willingness to criticise the providers paying their fees.
Butcher, who sits on both master trust and IGC, points to two instances of public criticism that suggest those overseeing schemes are not sitting on their hands.
In 2018, L&G faced criticism for lack of action on legacy charges, while he himself was involved in criticising Standard Life’s investment approach.
“If IGCs feel they should criticise publicly then they should. The point of an IGC is that they are independently minded people who will improve value for money for members and criticise in a constructive way.
“However, that may not always be achieved by shouting in a public place. Does that matter? From a consumer perspective all they need to know is ‘are they getting value for money?’. The regulator needs to see evidence of a robust challenge.”
The Standard Life example however may well be the most interesting. With criticism from both the master trust trustee board and the IGC, the firm’s default fund no longer includes its flagship GARS fund.
“With Standard Life we concluded we were going to remove GARs. We decide to remove it from the master trust and to recommend its removal (on the contract-based arrangement) through the IGC.”
However, as Butcher notes an IGC has no executive power. “It can’t decide to move the administration. It can decide it should be improved but the insurer must decide how to go about doing that.”
Henderson raises two possible future challenges. The first is the performance and response of trusts and IGCs to more difficult markets – something they haven’t experienced since auto-enrolment.
Second, he says it may be possible that at some stage IGCs become formally regulated, though he adds, he has no insight into whether the regulator is thinking that way.
Regulators are however adding new duties to IGCs including oversight of the proposed income drawdown pathways for non-advised pension savers, a requirement to report on provider’s environmental, social and governance policies and a more active role overseeing communications and engagement programmes with scheme members This has led to some misgivings.
Aegon pension director Steven Cameron says: “The FCA clearly sees IGCs as successful as they propose extending their role to monitor value for money of investment pathways for drawdown and possibly also for non-workplace pensions. It is important, however, not to dilute the focus IGCs have. There’s also a risk in some of the FCA’s proposals that IGCs begin to be asked to perform ‘executive’ responsibilities which should remain with their providers.”
Long adds: “Extending the remit puts a lot of extra work on their plates. The FCA has plumped for IGCs to be the tyre-kickers on their drawdown retirement pathways. The regulator is effectively hard wiring the retirement choice architecture into all pension plans, so I’m not sure what extra the IGCs can add here. It’s difficult to see meaningful improvements in understanding for retirees when the solutions will become homogenous. It is hard to see where innovation will come under this tightly governed retirement process.”
For some consumer advocates, however, regulation has still not gone far enough.
Financial Inclusion Centre director Mick McAteer says: “Regulatio n rem a in s t o o fragmented and inconsistent. None of the governance structures have got to what was originally envisaged in the 1980s and 1990s. We need proper representation, proper transparency and proper management of conflicts of interest. None of the main sectors of the industry have ever reached even the silver standard let alone the gold standard.
“We need a new RU64. It was one of the most successful interventions. It gave effect to stakeholder pensions, requiring advisers to write and say why they were and were not making a decision. Members of governance bodies should have to explain publicly when they are making certain decisions or not making others. That would be the cleanest way to tackle the conflicts of interest.”