Ever since Share Action exposed the selection procedures adopted by the insurance companies setting up their “independent” Governance Committees, I’ve considered the composition of their Boards open to particular scrutiny. Independence is as independence does and as none of the Boards have done anything publicly (other than the patchy publication of terms of reference) , they cannot be judged by output.
But they can be judged against their potential for falling foul of conflicts of interest. I have worked for Zurich (previously for Eagle Star) and know how important the relationships are between insurers and the major consultancies – by which I mean Towers Watson, Aon and Mercer (with Barnett Waddingham, Punter Southall , Hymans Robinson and Lane Clark & Peacock not far behind). These consultancies are the gatekeepers for many of the large corporates pension decisions.
Former consultants packing IGC boards.
Distribution being key to the ongoing success of these organisations, it is only too easy for cosy relationships to build up between large consultancies and the IGCs and Master Trust boards of the insurers active in the provision of workplace pensions. I have written about the potential conflicts that Standard Life have created for themselves by appointing Barnett Waddingham as advisers to its master trust while offering Barnett Waddingham customers preferential terms on certain workplace pension products.
I am very uncomfortable that Scottish Widows have on its IGC such strong connections with Towers Watson. Not only is its Chair, Babloo Ramamurthy, a former executive of TW, but so is Mark Stewart and so is Tilly Ross – both formerly of Towers Perrin and Watsons. Scottish Widows have laid themselves open to charges of cronyism and a lack of diversity. We have to ask whether the Scottish Widows IGC is subject to the Towers Watson house view. If Scottish Widows is dependent to any degree on Towers Watson for existing and new business, they are open to the charge that they have packed the IGC with friendly faces.
How does Towers Watson feel about this? Knowing the integrity of that firm, I would be surprised if some of its consultants aren’t a little embarrassed!
I have been in contact with Babloo on this and should point out that he is not a trustee of the People’s Pension and therefore not directly responsible for People’s appointment of State Street (who coincidentally are the lead consultants to Scottish Widows – the appointment made before Babloo’s arrival). I will not rehearse the reasons for my opposition to State Street playing any part in the fund management or fund administration of workplace pensions.
But I will say again that were State Street to be subject to the FCA’s Fit and Proper Person regulations on individuals, they would struggle as an entity to be granted permission to control retail assets in the UK.
Why does this matter?
Charges of cronyism dog private pensions in the UK. Observers from overseas – and I mean in particular continental Europe and North America and Canada, are surprised by the low levels of governance in place around our pensions. They remark on how little we understand and mitigate the trading costs of our funds and they are surprised by the conflicts (such as those mentioned above) which go unchallenged in the UK.
For a leading financial centre, we do not, in the opinion of those I speak to, have a strong enough self-regulatory governance structure. This is what the OFT found in its report on workplace pensions and it is what the Governments attempts to strengthen both Trustee Boards and Insurance company supervision is about.
But already, the IGCs are being claimed by the insurers as their own, and already there are worrying signs that the Boards of IGCs don’t know what they are doing and who they are doing it for.
Who can do anything about this?
Conflicts are rife. The editors of many of our trade magazines are conflicted because the insurers and fund managers are now their principal sources of income (advertising). Even some of our trade bodies have come to depend on advertising revenues from insurers and fund managers. Despite the Bribery Act, the boxes of Twickenham, Ascot and Lords are still home to the fund managers and insurance company executives whose guests include the people charged with overseeing their behaviour.
The systemic problems with analysing value for money result from a failure among the consultants charged with knowing about costs and charges, to properly manage the fund manager’s behaviours to keep those costs and charges down. The damage to our funds has been done on the watch of the people who are now being appointed to govern the fund management of our personal pensions.
How can we expect those consultants who have stood by and let the train crash happen, to criticise the manning of the signal box?
Is it any wonder that they struggle to adopt the FCA’s vision for Value for Money?
What price independence?
Independence is in short supply. As I have written about many times recently, those independent voices who are both skilled and knowledgeable, are not on the IGC boards.
There are rare exceptions- John Howard on the Scottish Widows board is one- but he is but one voice in seven!
With the exception of Zurich, who do not give their corporate members a vote, all trustee boards give the insurance company a substantial vote (usually 40%) on any decisions taken, statements made. It only takes one independent member to be in the pocket of the insurer to render the Board quite dependent. The seven person board of Scottish Widows is -alongside Zurich’s- the only non five person board out there- and it has its own issues (see above).
The temptation for IGCs to simply validate decisions taken in the past is too great. We need fresh blood on these boards, not the former consultants and other pension industry figures who dominate them at the moment.
We need less multiple appointments – (NB Rachael Brougham and Steve Carrodus), insurers in the workplace are a small club – we don’t need an over- concentration of IGC members around a few individuals.
And we need to challenge the dead hand of the past on the output from the IGCs. I will return to this theme but leave this blog with the Society of Pension Professionals vision for the output of these IGCs.
If this is consumer friendly – I’d rather be a Dutchman!