This is less of a blog – more of an epic!
If you want to have a go yourself, the link is to http://www.fca.org.uk/your-fca/documents/consultation-papers/cp14-16-response-form
The Pension PlayPen’s response was submitted online and this text is what we got back from the FCA (other than the questions which I’ve interpolated so you can know what we were responding too).
As I’ve said in other blogs, the simple formulation “value for money” is very good as it makes it clear to everyday people what pension governance is after. If all trustees of occupational schemes were guided by the principles of maximising value and minimising cost, then their lives would be a lot simpler and governance a lot more focussed!
So as not to make a long blog longer- here is what we said to Jonathan Reynolds and his team at the FCA.
We would welcome views on the likely equality and diversity impacts of the proposed rules
Our concern about equality and diversity in pensions stems from the asymmetry of information. There are 1.25m employers who will stage auto-enrolment and 200,000 employers “born” every year. While the 15-20,000 larger companies that have already staged have access to good quality information and can afford advice, most other employers have little or no knowledge (the OFT findings). Inevitably, many of these employers are marginal to the economy, often operating in the grey area. Many are non VAT registered, non-incorporated and financially unsophisticated. These organisations are (as a sector) least capable of taking good decisions for their staff on workplace pensions. We welcome this paper as it introduces help to such employers and protection to workers who might otherwise have found themselves enrolled into schemes that did not have appropriate governance standards. The risk of financial malfeance in providing workplace pensions to SMEs and micros is, as a result of poor information and little advice, particularly strong. Pension PlayPen believes these proposal will have a positive impact on those employers outlined above. ——————————-
2.Do you agree that deferred members of workplace personal pension schemes should be within the mandatory scope of IGCs?
We think it is essential that all money in a workplace pension scheme is respected in the same way. We are pleased that the DWP’s minimum governance standards are addressing differential pricing by abolishing AMDs. There is a high incidence of people having to move jobs against their wishes. They are penalised once by losing immediate income and should not be penalised twice by losing their deferred income. Trustees of Occupational pension schemes have long recognised that their duty of care extends to “actives”,”deferred” and “pensioners” equally and this principal should be extended to those on the boards of IGCs. We are particularly concerned about the issues of “lost pots” and urge the FCA to include among the duties of an IGC, a responsibility to take reasonable steps to keep up to date information on deferreds. Much more can be done , within the constraints of the data protection act to keep a central registry of information and we would like to see better data sharing between Government and the operators of IGCs, especially where a national insurance number can identify a worker’s new employer. While this data sharing is most obviously applicable to the “pot-follows-member” initiative, we should remember that most small pots currently in existence are not going to fall within PFM’s scope. Providing a central data registry that allows deferred members easy access to all information about their deferred pots should be a long-term goal for Government, IGCs and the trustees of occupational schemes (including master trusts). Including deferred members within the mandatory scope of IGCs is an important step on the journey towards holistic information for individuals on all pension rights (as well as being critical to the protection of consumers from poor financial management) ——————————-
3.Do you agree that individual personal pensions, other than those that originated as workplace personal pensions, should not be in the mandatory scope of IGCs?
We don’t think that IGCs can properly act for the owners of individual pensions as well as workplace pensions. As the paper points out, individual policy-holders are likely to be more engaged, better advised and to be using their individual pots for more diverse purposes (tax-planning, inheritance protection and purely as a wealth management vehicle). The governance of workplace pensions may actually conflict with the needs of these policyholders. However, we would point out that there are a great number of individual policyholders who have saved for a pension and are orphaned from the advice and support that they paid for at the point of sale of the product. These individuals should not be left behind and we would urge the FCA to stress to the providers of individual pensions (whether actively marketing such products or not) that they have a duty of care under existing FCA initiatives such as TCF. In particular, where an adviser who was originally paid by an insurance company a commission to provide advice over the life of the policyholder, has lost contact with the policyholder, then the insurer must assume the duty of care to ensure that policyholder is provided with a proper level of service. We see this as outside the scope of this consultation but could be within the scope of forward thinking IGCs who consider all policyholders equal in their right to this duty of care ——————————-
4. Do you agree that individual personal pensions should not be in the mandatory scope of IGCs even where the employer contributes or facilitates payments?
The rules around “designation” of Stakeholder Pensions should be useful here. The designation of a workplace pension as the Qualifying Workplace Pension Plan would automatically mean (assuming it to be a contract based arrangement), it be included in an IGC’s scope. A Sipp should have an IGC if it is capable of being used as a QWPS but should only have responsibility for arrangements where it is designated as such and should not restrict the behaviours of owners of personal “employer-sponsored” arrangements. ——————————-
5. Do you agree with our proposals for which firms will be required to establish and maintain an IGC?
We see a contradiction between the proposal to exclude individual sponsored arrangements and include all arrangements which have two or more sponsored members. We understand the intention but the confusion surrounds the purpose of the group of policies. If the purpose is to provide a QWPS for auto-enrolment (the default workplace pension for the employer) then it should be designated as such and fall within the scope of the IGC. If the purpose is to provide funding for an individual contract where the decision on the policy choice is taken by the individual, it should not be in the scope of the IGC. The onus to exclude policies from designation should be the employer (who has effectively taken a pro-active decision on its reward policy). ——————————-
6. Do you agree that IGCs may be established at a group level?
We do We think that they should be. Effectively, where a financial services company continues to offer policies under a number of brands, it does so for operational, marketing or regulatory reasons. But the duty of care to the policyholder is subject to the Group’s policy. We think that the aims of the proposals, to increase consumer protection and ensure better choice in the market are not compromised by IGCs being established at a group level. This is particularly important where an insurer may have a portfolio of “brands” that have ceased actively marketing but are still managing policyholder’s funds. To determine that each brand should be subject to an individual IGC would be a waste of time and would divert resources from consumer care to unnecessary red-tape. We don’t see this would do anything for competition as the brands no longer compete for business or for consumer protection. We should point out the Chair of Pension PlayPen (Stella Eastwood) is Group Pensions Director of Lloyds Banking Group and is as such, conflicted in responding here. She asks that this view is not to be confused with the view of LBG.
7. Do you agree that an IGC must have a majority of members independent of the firm and that the IGC Chair must always be independent?
Yes, we think these are important characteristics for an IGC. We would hope that an appropriate budget is set aside by the providers to ensure that this information is promoted to employers and to all members (including deferred members). The positive aspects of independence can improve the commercial efficiency of a scheme (even if the only measurable is the lack of transfers out of the scheme). The FCA should work closely with all insurers and other providers to promote their IGCs.
8. Do you agree that an IGC should have at least five members?
Yes In our previous response to Government we said that seven was two too many. Five is the correct number.
9. Do you agree with our proposed definition of independence that would allow trustees of a firm’s master trust to be independent IGC members?
Yes. Insured master trusts are replicating almost exactly what the group personal pension and group stakeholder plans do. The major reason for an insurer to run a master trust beside a GPP is as a means of taking bulk switches of money from an occupational pension scheme. Typically this is where the trustees of a ceding scheme do not want to be responsible for the governance of the transferring assets. The standards of governance within an insured master, trust, needs must be good, for such a transfer to be sanctioned. So we see these master trusts as having a priori high governance standards and fulfilling the same function as the contract based plans. For that reason we consider that trustees be interchangeable. The proposed definition works in this respect by ensuring proper independence. We have no difficulty in IGC members serving on a number of IGCs but would warn against “IGC bagging” where some professional trustees may be tempted to join large numbers of boards to further their careers and thus dilute their impact on any one board. We don’t suggest prescribing a limit on the numbers of boards a member sits on but we would suggest that people who sit on multiple boards are subject to particular scrutiny to ensure they are not abusing the system. Much the same can be said for the current system of non-executive directors.
10. Do you agree that we should not require firms to indemnify IGC members?
We think that the rules governing the indemnification of non-executive directors should equally apply to the insurance of IGC members. Members who act without indemnification should be aware of the risks run and we would expect them to be capable of assessing these risks prior to joining. Where prospective members are incapable of making that assessment, they should decline to join.
11. Do you agree that members of the IGC, including the IGC Chair, should not be approved persons at this time?
Yes The approved person rules would create a carve out for eligibility that would be undesirable for a number of reasons. It would give rise to suspicions of a “club” and accusations of “cronyism”. This would not help the perception of IGCs as improving competition. It would exclude many sound people who don’t want to go through the mill of approval. Many consumer champions wouldn’t want to make it! It would create a lot of unnecessary bureaucracy to the ultimate expense of the member. It is hard to see what approval would add to the process by way of member protection.
12. Do you agree that we should require firms to recruit independent IGC members through an open and transparent recruitment process?
Yes. This is preferable to an unworkable election process. The costs of recent elections to public positions have proved that “democracy at any price” is not popular. There is a strong market among recruitment firms for this work and we’d expect the costs of recruitment would not b onerous relative to the scope of the work. We want the appointments to be made public and indeed promoted. We think there should be a process in place, as happens at some occupational pension schemes (like the LPFA), where members , unions and consultants can ask questions of the IGCs and (if necessary) call them to account.
13. We would welcome views on the proposed duration of appointment of IGC members.
We have no particular expertise in this area and would defer to organisations such as PIRC and ShareAction who can better comment. Purely as individuals, there is a consensus among us that the durations proposed seem fair and reasonable
14. Do you agree that we should permit the appointment of corporate persons to IGCs, including as the IGC Chair?
We don’t like the appointment of corporate persons and favour individual accountability. We have seen the gradual erosion of the member nominated trustee in occupational schemes which has been linked to ideas such as “de-risking”. It is only too easy for individuals to hide behind corporate entities to avoid accountability. But this doesn’t play well to the twin aims of the IGCs, to protect consumers and encourage competition. We don’t see consumer champions like Ros Altmann, Martin Lewis and Paul Lewis hiding behind corporate entities. People buy people and in our own limited sphere, people buy the Pension PlayPen because of Henry Tapper not because of the corporations he represents. Necessarily, many of the corporate trustees will have to argue our of vested self-interest in favour of corporate members of IGCs and corporate Chairs. The majority of corporate governance entities that would compete for this work are faceless to the public. They would not foster member engagement with the governance process and could easily bring IGCs to a level of box-ticking anonymity. Corporates are too easily conflicted and those conflicts are usually not aired, being subject to NDAs and other corporate mechanisms. So we don’t see the public feeling more comfortable that Pitmans is Chair of xyz , rather than Richard Butcher. Indeed the public want individual accountability and a face to talk to, not a logo.
15. Do you agree that there should be no restriction on the duration of a corporate appointment?
We don’t agree with corporate appointments (see Q14) but accept that were they to be allowed, we would want to mitigate their potential detriment So, where a corporate appointment is made, a nominated person should be put forward and that person should be subject to the same durational restrictions as a non corporate (see our response to Q13).
16. Do you agree that IGCs should consider in particular the value for money received by individuals enrolled in default funds?
We do. We very much like this simple formulation and consider it much easier to work with than the Principles and Characteristics promoted by the Pension Regulator. We see no move among the Great British Public towards “making themselves a nation of CIOs” and so we see current levels of defaulting being maintained. The idea of Value for Money contains both the upside created by skill (alpha) and the downside created by the costs of a scheme. The formulation includes the word “received” which is critical. We cannot consider performance in isolation from outcomes, it is what the member actually gets that matters. This formulation is easily understandable and provides consumer protection. It is also easily measurable and will aid competition. www.pensionplaypen.com provides six metrics for assessing a workplace pension that also include administration, communication the “at retirement service” and a view on the sustainability of the Provider’s business model. The value for money formulation represents around 60% of the weight of the purchasing decision and as such is the single most important measure on our balanced scorecard. We would be happy to discuss this analysis with the FCA as we have taken around 400 employers through the decision to purchase a workplace pension in the last 12 months and have some important data we can share on what employers actually consider important (based on the weightings they give to our metrics)
17. Do you agree that, at a minimum, IGCs must assess whether the characteristics and net performance of all investment strategies are regularly reviewed by the firm?
We do. This is the minimum and we would hope that they are also prepared to look at the other metrics. In particular we would want IGCs to engage with Providers over at retirement issues. The decisions people take about how to spend their pension savings are likely to be a lot harder than how to save and where to save. We are also keen that IGCs pay regard to member communications and the record keeping and the external interfaces of plans with employer systems, Finally we think it is important for IGCs to ensure that the Provider is providing a durable service and is running its workplace pension business in a way that ensures a sustainable service
18. Do you agree that, rather than mandating a particular approach, we should allow individual IGCs to determine how best to assess value for money?
Yes, This is because the due diligence of firms such as First Actuarial (which provides research and ratings to Pension PlayPen) encourages diversity and competition. By mandating a single approach to the assessment of “value for money” Government is over-regulating, discouraging competition and adding little to consumer protection. We must trust the advisory market to “guard the guards” but we must make the determinations of IGC public so they can be scrutinised by third parties with the skill and knowledge to give an expert opinion.
19. Do you agree that IGCs should be required, at a minimum, to review the three aspects of scheme quality proposed, and should consider other aspects as appropriate?
We like the three aspects of scheme quality “default investment strategies are designed in the interests of scheme members, with a clear statement of aims, objectives and structure appropriate for scheme members ,the characteristics and net performance of investment strategies (including non-default strategies and/or funds made available to scheme members) are regularly reviewed by the firm to ensure alignment with the interests of scheme members, and action taken to make any necessary changes, and core scheme financial transactions are processed promptly and accurately.” But we think we need something added to them that ensures that Providers make signposting to decumulation options and the Guidance that will come with them, embedded into these three aspects. The simple solution would be to replace “non-default strategies and/or funds” with “at retirement options promoted”. – in the bracket of bullet 2. ——————————-
- 20. Do you agree that IGCs should consider all costs and charges, as proposed? If not, what would you suggest?
We need a precise and inclusive definition which enables fund managers to transact but ensures that care is exercised to make sure all costs are minimised and charges to members clearly represented. We and First Actuarial introduced you, via the DWP to Novarca and consider its work on the formulation for costs and charges to be excellent. In our submission to the DWP to their consultation on costs and charges we submitted a detailed proposal which is in line with what Novarca have suggested to us. ——————————-
21. We would welcome views on how best to improve the disclosure of all costs and charges, and how we could transpose the industry standards for authorised funds to pensions.
Our view is that the disclosure of costs be mandated by Government. The failure of the ABI and IMA to properly disclose and their current behaviour on disclosure of Portfolio Turnover Rates and soft commissions surrounding the payment of research suggests that this matter should be taken out of their hands. There is a simple rule, if it cannot be measured , it cannot be included. The onus must be on the fund management industry to fully disclose and on the Regulator to prescribe what is disclosed and how and to monitor that standards are maintained.
22. Do you agree that IGCs should be able to escalate concerns directly to the FCA, alert relevant scheme members and employers, and make their concerns public?
We think this is essential if IGCs are to add value. IF IGCs are not prepared to whistle-blow, then they should be held accountable where non-disclosure becomes apparent. Undoubtedly this will cause conflicts within IGCs and we see these as inevitable. But in the final decision, the IGC must put the member’s interest first.
23.Do you agree that the IGC Chair should be required to produce an annual report and that the firm should be required to make this report publicly available?
We fully support this measure. The full report should be publicly available on the web and IGCs should take reasonable steps to publish it digitally (including liaison with the press and other digital platforms (see Q26/7 below)
24. We would welcome views on where IGCs should focus their attention.
As mentioned above, we believe that with the changes in the rules governing the taxation of pensions in payment, many contract based pensions will pay income and cash to policyholders, well after the formal accumulation phase has finished.
We think IGCs should focus attention on the behaviour of the Provider in either offering these options or signposting other options (annuities or CDC). We think IGCs have a role to play ensuring members (including deferred members) get regular effective communications and that member records are properly kept up to date (particularly important for deferred members)
Finally, we think IGCs should be concerned about the support providers give to employers in administering auto-enrolment. We would like them to be working to common data standards which reduce the work for payroll and to manage the transmission of HR and payroll data transfers digitally, and using web-based technologies. Finally we want regular meetings between IGCs and senior management of the Provider to conduct the equivalent of a “covenant assessment”, ensuring that the fundamental strategy of the provider continued to focus on being competitive in the market and acting in the member’s best interests.
- Do you agree that we should place a duty on the firm to provide the IGC with all information that it reasonably requests for the purposes of carrying out its duties?
Yes, we think this should be part of the minimum standards to offer a Qualifying Workplace Scheme and should form part of the relevant sections of the FCA’s Code of Business Practice. We don’t consider this as onerous to Providers. It should be business as usual, and if it isn’t, there is something wrong. ——————————-
26. Do you agree that we should place a duty on the firm to provide sufficient resources to the IGC as are reasonably necessary for it to carry out its duties?
Yes we do. The definition of “reasonable” will of course be fought over , but we expect any shortfall between what could reasonably expected and what was delivered to be clearly published in the Chairman’s annual statement and reported to the FCA and (in extremis) to other stakeholders – including members- as the need arises
27. We would welcome views on possible arrangements to ensure that member views are directly represented to the IGC.
We know that several insurers – including Pension Insurance Corporation, Standard Life and Legal & General, already offer “one to many” sessions with groups of policyholders in towns around the country. We support these public meetings which we think have a role in supporting at retirement guidance as well as delivering savings information.
These group meetings are a great way of getting feedback from engaged policyholders and we’d like to see IGCs being represented or even running these meetings. We also think social media has a huge part to play. IGCs can use Facebook, Linked In and Twitter in particular to interact with members.
These facilities can signpost users to information from IGCs as well as pick up feedback via comments and re-directions to forums set up on IGC websites. We don’t think that IGCs should be getting into face to face advice or even telephone of Skype conversations but they should be referring policyholders to the right places to continue discussions (to the provider, adviser , TPAS or MAS)
28. Do you agree that the firm should make the IGC’s annual report and terms of reference publicly available?
Yes, see Q27 above. This information should be digitally produced and a full version be published on the web, simplified versions should also be available. This information should be pushed out to policyholders digitally ——————————-
29. Do you agree that we should place a duty on the firm to address concerns raised by the IGC or explain to the IGC why it does not intend to do so?Yes There should be recourse to the Pension Ombudsman where a member wants to raise a complaint against the IGC and a procedure at TPAS to provide a screen to ensure that worthless complaints don’t clog up the system
- 30. Do you agree that GAAs should be allowed as an alternative to IGCs for firms with smaller and less complex workplace personal pension schemes?
Yes We see a number of very small Providers for whom the cost of a full IGC might negatively impact its carrying out its duties, ——————————-
31. Do you agree with our proposals for the type of firms that can use GAAs?
Yes. We think this is a matter of discretion for the FCA and granting the option to use a GAA should be its gift
This post was first published in http://www.pensionplaypen.com/top-thinking