From this year, insurance companies must create both internal and external controls to ensure they carry out the responsibilities they are taking on when helping us save and spend our pension pots.
Yesterday afternoon I spent time with insurers and other advisers at the FCA, discussing how to help manage the spending of the money, not by restricting pension freedoms but by promoting them. In the group I was in were people from NEST, Standard Life, Scottish Widows and Royal London and while the Rules prevent me recounting what was said, I don’t think I heard a comment in three hours that was obstructive to the common weal.
But once people walk out of the doors of the FCA’s Canary Wharf’s offices and take their planes back to Scotland or trains back to Swindon or bikes back to Blackfriars, thoughts turn to the bottom line, to job preservation and to pleasing the masters (usually these days the shareholder.
Ultimately, insurance companies still judge themselves by market share and distribution is king. I simply don’t see them ranking each other by means of outcomes.
In olden days, we used to look at the payouts on such insurance staples as the 25 year endowment, or ten year term assurance premiums or annuity rates and judge performance against such metrics.
But we have lost this accountability as insurance products become ever more complex and as more of the risk is laid off to third parties.
Take investment; in olden days the accountability for investment performance rested with the insurance company (whether you invested in a unit-linked fund or in a with-profits fund). But then came open architecture which allowed people to choose one of many investment managers, the only responsibility of the insurer was to manage the cost of management.
To begin with, this choice was taken, external managers were referred to as “guest funds”. Like guest beers, guest funds were a bit of a novelty , no-one cared too much about how much they cost or how they did, they looked nice and the main action was in the core range of in-house funds.
But gradually over the last twenty years, the guest funds took over, it is now possible to find one of BlackRock, L&G, Vanguard or StateStreet passive funds in every large workplace pension product offered by insurers. These low-cost , low-risk funds that do what they say on the packet have taken over from the higher cost, more ambitious funds that sometimes achieve and sometimes don’t.
The assumption has been that there will be educated people on the buy side of every decision who are capable to providing advice on which funds to use as people build and spend their savings.
The changing customer
This assumption has been challenged by the change in the customer and the way that customers access products. With over 1m employers who know next to nothing about pensions due to make purchasing decisions on behalf of staff and with £6bn of existing pension money due to be liberated in the second quarter of 2015 (thanks Chris Noon of Hymans), we are seeing an explosion of customer decision making. Most of the customers are going to need to take investment decisions- even if the decision is not to invest.
The disappearing advisers
The Retail distribution review has improved the quality of advice but it has reduced the number of advisers. Advisers have taken on the role of investment advisers, a consequence of the extension of investment ranges mentioned above.
Those advisers who are left to advise people on a one to one basis are focussing on a small slice of those with pensions, those typically with at lest £100,000 and typically more than £250,000 to invest.
To get help with smaller amounts, you either have to pay a high a proportion of your wealth or rely on default options offered by the insurers.
The re-emergence of accountability among insurers.
The main role of insurance executives over the past 20 years has been to de-risk their balance sheets of risk. Many insurance companies are today no more than distribution platforms for other people’s products. With investment management and investment accountability outsourced to other fund managers and advisers , insurance companies have become aircraft carriers rather than battleships.
During the last fie years, politicians and civil servants and pension commentators have worked out that these distribution platforms , while no longer doing the work themselves, must be accountable for the outcome of the work that is done.
So the funds that are offered, the way the offerings are framed, the tools with which people can measure how these funds work and the ongoing measurement of the fund managers themselves becomes the business of the insurer. The customer’s experience is ultimately the responsibility of the insurer (the mothership).
The importance of insurance company governance
When the OFT reported last year on workplace pensions, it found not only that the purchasers of workplace pensions didn’t know what they were doing, but that the supply of services to those purchasers was exploiting poor purchasing by delivering poor product.
The ABI legacy review has confirmed that much of the money being managed by insurers on behalf of workers who bought through employers is badly managed and over-priced.
As part of the deal to put this right, the insurers agreed to strengthen their governance. L&G were first to move and have put in place a governance framework for their trust based and contract based products that we are very happy with. It ticks all our boxes.
Standard Life are next to announce and their first appointment has not met with my approval. The appointment of a key distributor to provide advice to those governing the master trust is disappointing. It is – as I said yesterday – a declaration of inter-dependence rather than independence.
Lessons from the past.
The breakdown of trust in insurance companies was largely a result of a confusion between the need for distribution (by which insurers are usually judged) and accountability for good outcomes. This confusion was created by allowing the needs of the distributors to manipulate outcomes. Witness the manipulation of with-profits pay-outs to attract new people in on the back of exaggerated pay-outs to the old people.
When the music stopped there was not enough money in the pot to pay the new people the old people’s rates and we got shortfalls in endowments and the pension pay outs had to be slashed to meet marketing promises.
We must not let this happen again. When we see conflicts on the horizon we must shout and shout loudly so that those conflicts do not set precedents that are followed by others. We should not be prescribing who should be providing investment advice to the trustees of the Standard Life Mastertrust , but we can and must shout loudly when the appointment is so conflicted as that announced earlier this week.
There are alternatives. The top investment consultants in the land- the Paul Tricketts, the Inder Dhingras, the Ralph Franks and several others who are genuinely independent from the distribution of the fund.
The appointment of a corporate benefits consultant on whom Standard Life to distribute pension product should ring general alarm bells. I am writing in my own capacity and I hope that others will see things the way I do (or the campaign to turn off the Tap may well succeed!).
Where Standard Life go, others follow, this appointment sets a bad precedent that could lead to the discrediting of the IGCs that are currently being put in place.
It is important that the big consultancies , with the skills and knowledge to influence decision making show leadership and not stand idly by. Unless we notice and register our views, who else will?