It has been an important week for the regulation of workplace pensions.
Not only have the DWP published the rules that govern workplace pensions qualifying to be used for auto-enrolment, but the FCA published – on the same day- the rules for the enforcement of such rules by Independent Governance Committees. For those who have moaned about the lack of joined up Government elsewhere in pensions, this should be welcomed!
While I have little to say about the DWP document, other than to applaud that we have moved a step closer to implementation, I have much to say about the Final Rules for Independent Governance Committees – good words
While there are things in the paper , we argued against (notably the inclusion of corporate trustees as potential participants in IGCs), the good so outweighs our minor concerns as to be of no matter.
Most important of all, the FCA appear to be taking a no-nonsense approach to the disclosure of costs as part of the “value for money” formulation. We have yet to arrive at an agreed template to be presented to fund managers so that IGCs can discover how much members of workplace plans are paying for intermediation, but I am confident that a simple template will be coming soon.
Despite the protestations of fund managers, even their trade association seems to have accepted that the basic measures that fiduciaries need to assess cost are communicable!
If you think about it, it would be shocking were they not! Can you think of a single product where a professional buyer could not be told the price he or she was paying for a product or service?
Which brings me on to “buying”. The latest “concerns” expressed by those on the sell side of fund management are all directed at the consumer
- That consumers might interpret costs incurred in previous years as indicative of costs to be incurred in years to come
- That consumers would be unable to see the wood (value) for the trees (costs)
- That in discovering how much was going in intermediation, consumers would turn on pensions.
I think we need clear-headed thinking on this. Firstly on past costs, we really should expect consistency in the incurring of costs from year to year. If a high cost manager is following a strategy that delivers out-performance as a result of these transactions, then a decision to continue to use him, should be based on an acceptance that these high costs could and should continue.
If the costs in the past were accidental and not to be repeated then an IGC should take a dim view of this. Accidental costs suggest a lack of controls and too little focus on treating a customer fairly.
The IMA and their members are shooting themselves in the foot in suggesting that past costs should not be considered as indicative of what is still to come.
Nobody, not the FCA or Insurers or Fund Managers should be expecting normal people to be taking decisions on funds they use for their retirement savings , on a detailed analysis of all intermediated costs within a fund.
That is whey IGCs have been set up and it is why we have occupational trustees. These people should be sufficiently skilled and knowledgeable to see the wood for the trees and make assessments of value for money. Consumers will continue to look at a default fund as the best guess of the IGC or Trustees as being in their general interest and will only make purchasing decisions beyond the default because they feel empowered to do.
Clearly IGCs and Trustees should do all they can to only promote funds on the platforms of workplace pensions that do not put retirement savings in peril but a lesser duty of care is required where the consumer is ski-ing off piste.
TURNING ON PENSIONS
There is a very real chance that we will see class actions in this country by consumers who feel they have been let down by their fiduciaries in helping them with pension decisions.
Recently both Fidelity and Wall-Mart have been on the end of some stinging court judgements in Canada initiated by members who (in the case of Fidelity) objected to unnecessarily high charges and in the case of Wall-Mart objected to the lack of care taken in selecting pension services on their behalf.
The concern expressed by some at an NAPF event this week that by disclosing the true nature of things to members, we might see similar events in the UK is well-founded.
Were we to have a level of awareness of the importance of good management of costs and charges within pension schemes, such as fiduciaries such as fund managers, administrators and employers felt they were under the scrutiny of members- I WOULD BE GOOD!
We cannot expect confidence in pensions to be restored by continuing to hide behind specious arguments. We need simple measures that allow one fund to be compared to another for its value for money, the same test needs to be applied to other aspects of the workplace pension service, administration, communication, at and in retirement services.
Nor can we expect members to make these judgements unassisted, we need IGCs and Trustees to be doing the heavy lifting so that members can get on with their critical job, putting money aside for future consumption.
Finally, we cannot continue to protect people from the truth. If there are bad news stories out there, they need to be brought to people’s attention and, if necessary, those who have failed will need to get a kicking from fiduciaries, regulators and consumers.
STILL A LOT TO DO
We are another mile down the road, another stone has been passed, but to suppose that we have got there yet would be to give false hope to the kids in the back.
We are getting there. Thomas Phillipon, at a lecture at the London Business School put the journey in perspective. The total cost of intermediation (that is all costs between the distribution of a return and the return people get in their pocket) is around the same today as it was in 1880 – around 2%pa.
For Costs and Charges to fall substantially below this amount, means a sea-change in the way we go about buying, selling and regulating.
But there are three reasons to be optimistic
1. There is a higher level of engagement with these issues outside those on the sell-side (consumerism)
2. There is easier access to the data to monitor costs and charges leading to better education of fiduciaries and consumers
3. There is a clear structure being in place to empower fiduciaries (IGCs and Trustees) to do something about abuses and ensure high standards (where established) are maintained.
Which is why I am generally optimistic, albeit optimistic about improvement from a low base.