The Legal & General IGC Annual Statement was published yesterday (21st March) and good it is too. The link to it is here
As with Prudential’s statement, it’s tone is measured and severe, this is not a marketing document for its life company, (my principal criticism of Royal London’s statement).
While it does not measure VFM in terms of outcomes (as Prudential’s does), it is the first of the IGC statements that genuinely addresses investment issues looking at total cost and returns with the rigour one would expect of its Chair- Paul Trickett.
It has weaknesses, the aforementioned absence of a proper measure for VFM being one, a rather weak analysis of what constitutes “Pension Freedom” being another. The document claims that the IGCs overall work in response to the OFT report (in reducing legacy charges will amount to £1m pa). This seems a very small number.
However, the report outlines concessions from the life company that should be noted by other IGCs. In particular the agreement from L&G that…
members will not be charged to cover the cost of commission payments made by Legal & General to an adviser
It starkly points out that
These payments were supposed to be to cover the cost of continuing provision of advice. We doubt that this continuous advice has been provided in all cases.
This is the right course of action not just for L&G but for other lifecos. There is a tacit criticism here of life company culture which allowed commission payments to continue when the life co new full well that no advice was being given. L&G were relatively unreliant on commission payments to source new business and other life companies that were, may feel that this is another example of Legal & General acting holier than thou. If they feel that way, we should have no sympathy, L&G turned off the commission tap earlier than others and should be entitled to benefit from having less severe a legacy problem as a result.
I am also a big fan of the approach the IGC seems to have engineered by which L&G will contact employers operating what appear to be poor value charging structures and prompt them to change the default investment strategy to one that offers more VFM. If this can reduce member charges by 0.38% then the overall saving looks rather more than the £1m pa the IGC is taking credit for.
The IGC is clearly frustrated that it still does not have the management information to properly determine what policyholders are actually paying for their pensions.
At times the tone of the report is quite reproachful. I am pleased to see this, I have yet to find a life company that has properly come to terms with the fact that the AMC is not a proper statement of what a member pays.
Consequently there is no proper statement of whether the transaction costs on the funds are under control nor a proper assessment of whether overall value for money is being achieved. We will have to wait till 2016 for more and then only if a proper framework for assessing price is agreed by Government and across all IGCs.
On Freedoms, flexibility and communication
The remit of the IGC is to define both money and value and while the sections on return and default investment strategies are strong, those on the more fluffy aspects of workplace pensions are weak. I do not sense that the IGC has properly entertained what “good” could look like. L&G are – relative to their peers good on these fluffy factors , but relative to what the public want – a way of accessing money and information in real time, they are still way off the pace.
There may need to be work done on benchmarking good across countries and across sectors, we seem to have cracked freedom of information in other parts of the economy and other pension systems seem to be doing better than the UK.
My general comment is that these sections of the report do not really hold the life company’s feet to the fire, mainly because the IGC doesn’t seem too sure of its ground.
On default investment strategies and returns
Here the report is really strong. The IGC is critical of the life cos internal Investment Committee of which it says “since the IGC’s initial input it has seen little sight of progress.
The IGC found 201 separate default strategies operated by employers and clearly felt that not all of these are working properly. I am pleased to see the IGC insisting that employers are called to count on how these strategies work for the members.In my experience, many were set up with good intentions and fallen into destitution through lack of ongoing care and attention.
There is also strong words for L&G on the reporting of fund performance and its benchmarking. It rightly points out that there is huge scope for improvement in this area.
So what’s the verdict?
Of the three IGC Chair statements I have read, this is the one that has the greatest understanding of investment risks and the rewards of getting investments right.
It does not have the same rigour in measurement as the Prudential’s but like the Prudential’s it has the right tone.
As a policyholder, a representative of an employer with an L&G workplace pension and as an adviser, I regard this as a really good document.
So on my three measures;-
- The position the IGC was adopting to value for money, and in particular, the assessment of value for money benchmarked against best practice gets an amber – it is lacking because of lack of information rather than intent
- 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 a green – this is the most member focussed IGC report I’ve seen so far)