Prudential’s Independent Governance Committee has published its Chairman’s report and you can read it here. You cannot find this link on http://www.pru.co.uk nor has there been any notice of its publication to the public via either of Pru’s two UK social media feeds. Infact the only way I knew that the report had been published was because the pension press reported on it. You can read Professional Pension’s report here. (I suspect that Stephanie Baxter read the Prudential’s press release and not the IGC statement itself).
I’m grateful to Rachael Vahey who managed to find the report via Google but astonished that Prudential have launched this important document as it has.
Putting aside the inept mismanagement of its publication (that says a lot for the Prudential’s attitude to its own IGC), the report is excellent and a huge improvement on what we got from Royal London the week before last.
A proper formulation for VFM
The most important improvement is in the creation of a meaningful statement of what the IGC considers value for money to be.
This is the key statement in the report and the most meaningful statement produced by any IGC so far.
Pragmatically, we have used a reference point for fund performance of CPI +3%pa (after charges) over a sustained period. If fund performance has been delivered at this level or above, we believe that VfM concerns do not arise in relation to investment returns
Of course that is not the end of the story, but by putting the emphasis on actual outcomes and not marketing gloss, the IGC are holding the Prudential’s feet to the fire.
I know Laurence Churchill, I worked for him. I hated working for him as he was the most rigorous boss I have ever had. I would hate to be the Prudential and have Laurence as the Chair of my IGC.
If I was Laurence next week, I would be kicking seven bells out of the Pru’s PR team for relegating this excellent report to a hardly google able “top-shelf”item.
Collateral benefits of a good VFM formula
The formulation in the quote above comes into its own throughout the report. Here for instance
We have not yet assessed individual transaction costs, but we are assessing investment returns after all charges, including transaction costs, so have taken their full impact into account.
This is correct and as it should be. Rather than sit and complain that not enough has been done by the Regulators to create a framework for assessing transactional costs, the IGC has gone straight to the heart of the matter – what value is arising net of charges – is the 3% +CPI charge being met?
Another instance of serendipity is the weighting of secondary factors , clearly explained in the report
The IGC’s approach to VfM takes account of a range of factors, including charges, performance, service and communications. However, these have been weighted to reflect our view that what ultimately matters is the outcome for members
we prioritised investment returns and charges as being the most important elements of VfM.
though the IGC sees its work developing
the quality of communications (this issue is rated highly by members, but also reflects a combination of both Prudential’s performance AND that of the Employer). We anticipate more work on the quality of communications in the years ahead
The right tone
I was struck in my reading of this report with its no-nonsense matter of fact approach. The IGC clearly had little truck with much of the flim-flam from marketing which is brutally dismissed.
The IGC did not identify any additional benefits within the unit-linked book. We discounted the proposition that recovery of charges for commission paid to an adviser was for a service to the member that should be classified as an additional benefit.
likewise- over-priced funds are summarily dismissed
We inspected charges higher than our reference point and current analysis indicates that there are around 1700 policies (within the IGC remit) in higher charging funds and we have confirmed that they were chosen by the member. However, the underlying assets in these funds do not typically seem to be specialist and Prudential is writing to members to inform them.
While the statement stops short of referring the Prudential to the FCA, it leaves the reader in no doubt that something was rotten in the state of Denmark.
The back of the report is involved with the immediate issues surrounding clearing up the Prudential’s legacy. The Prudential are extending the methodology agreed with the IGC for personal pensions to its occupational book (something that Royal London has not agreed to do).
This is a major win for trustees and (more importantly) members in insured arrangements with the Pru. The Pru have a huge book of AVCs , many of which will benefit. I cannot run a slide-rule over the numbers to calculate the nominal value of the various savings negotiated but they look significant. As reported by Prof Pens (and presumably by the Pru’s corporate team) they look like this
- Across the Independent Project Board population, including auto-enrolment (AE) schemes, the average charge falls from 1.26% to 0.92%.
- For non-AE schemes but including trust-based schemes the average charge drops from 1.48% to 1.02%.
- For non-AE schemes which are contract based, average charge falls from 1.22% to 1.04%.
More green than amber – a thumbs up from the Pension Plowman
Taken as a whole, I am impressed . As with Royal London’s report, I am sorry that the report makes no mention of the stewardship over Prudential’s investment (whether in in-house funds or with third parties). However on my three key measures I am pleased
- The position the IGC was adopting to value for money, and in particular, the assessment of value for money benchmarked against best practice gets a green
- The tone of the document, especially whether it demonstrates it is written for members (rather than to please those who pay the IGC’s bills or the Regulators), gets a green
- Its capacity to address specific issues with the provider where member’s issues might be prejudiced (gets an amber – more needs to be done on investment next year)