whatever that means

Reading the Scottish Widows IGC report, I felt a little uncomfortable; it wasn’t until I read Professional Pensions that I understood why. Professional Pensions is properly reporting the party line , the IGC…

“is encouraged by the provider’s “progress” in delivering value for money”.

I do not disagree, Scottish Widows have gone further than any other provider in reducing legacy exit penalties and modernising old contracts. Scottish Widows have improved their workplace pension contract to the point that it is now regularly chosen by small employers on http://www.pensionplaypen.com. It has been quite a turnaround, albeit too late to grab anything like the market share of workplace pensions they originally envisaged.

What is concerning is that the IGC Chair report reads like a marketing document promoting this turnaround and the Professional Pensions article promotes the IGG’s promotion!

Transaction costs reduced returns across these funds by less than 0.05% per annum (pa), and no individual fund’s transaction costs reduced returns by more than 0.15% pa.

Of the 29 funds 14 were passively managed equity funds, and 15 were actively managed equity funds, including a number of low-risk funds.

Interestingly, the figures are lower than the Financial Conduct Authority’s (FCA) estimate that actively managed equity investment incurs an average 0.5% in transaction costs.

This suggests that the FCA are over-egging the argument, that Scottish Widows have low transaction costs and that the difference in transaction costs between active and passive funds is considerably lower than anyone thought.

But turning to the report itself, there is no detail on how transaction costs are being calculated, if the analysis includes costs incurred by life styling or reinsurance or exactly which funds are incurring higher costs and which not. In short we are being asked to take the IGC’s word for it, which I am disinclined to do. My reluctance springs from the insistence of the report that where problems exist (engagement) the problems are industry-wide and where problems have been resolved, the solutions are down to Scottish Widows. The problem is one of tone – the IGC feels like a marketing document for Scottish Widows.

Matters aren’t helped when a Scottish Widows spokesperson wades in with two paragraphs of the usual nonsense

“Over the course of the year we have continued to work hard to meet the challenges set to us (Sic) through recommendations proposed by our IGC and feel we have made significant strides to offer customers better value for money.

“Over the course of the coming year we will focus on further improving the support and guidance available to customers, helping them get the most out of their pension savings.”  

The report itself

Thought the IGC Chair has got the tone wrong, there’s no doubt that the IGC has been successful in driving out value for members with old-style pension plans. The IGC is made up of some industry heavyweights and I’ve no doubt that they have been responsible for much of the improvement.

The bulk of the report concerns itself with rating key features of the workplace pension using a RAG (red amber green) scoring system. I found this part of the report really helpful as it focussed on the things that employers and members should be focussing on and delivered cogent insights.

The admin train crash that saw Scottish Widows become a workplace joke in 2014 and 2015 started to turn around in 2016 and continues this year. The IGC gives Scottish Widows a green for administration which may reflect the 58% fall in complaints last year but the sad truth is that service levels are easier to maintain when new business dries up. The majority of payroll software suppliers are reluctant to use Scottish Widows and will charge employers a premium for the perceived risk of using Widows’ admin. The green rating is relative to past performance and not to the market! To maintain green, I’d suggest that the IGC benchmark Widows service to the market leaders (NEST, Peoples, L&G).

The investment score is an amber, partly because the IGC can’t see how members can understand  how the Personal Investment Approaches (PIAs) work. Frankly I’m not sure that most members want to see under the bonnet, but transparency is all. More cogently , the IGC is demanding to know what is driving the choice of external managers (I have grave reservations myself). Keep pushing guys!

The engagement score for Scottish Widows is an amber. The reality (which the IGC avoids mentioning) is that most of Scottish Widow’s employer sponsored schemes were put in place by IFAs who were paid commission to engage staff. The commission is gone and so is the engagement. Other providers decided to engage with members directly and not rely on commission or IFAs, Scottish Widows are reaping what they sow but the IGC is right to keep pushing – there is plenty to be done.

As for Governance, Scottish Widows gets a green which appears to be more a function of them having to conform to Lloyd Banking Group’s processes and controls. While I can see a green as the right score for the moment, it’s worrying to think what might happen if the LBG governance framework was removed (if Scottish Widows was sold).

Finally the report looks at costs and charges and accords Scottish Widows a Green status. We at the Pension PlayPen can (and will) give the IGC some feedback on how Scottish Widows have been pricing at the employer level (disastrously) but – from the evidence presented in this report, it would appear that the money element of member charges is under control.  I’d stop short of concluding, as the report does, that this means Scottish Widows are providing value for the money – that has yet to be proved.

In terms of tone, I think this report has got it wrong, and so badly wrong that I am giving it a Rag- Score Red – this report could be confused with a marketing document and it shouldn’t.

In terms of effectiveness, this report confirms that the IGC has done a great job over the year. I’m giving it a green.

As for “value for money”, I’m not convinced that these guys are really serious at getting to the heart of the matter. The VFM section is not fund specific and contains too little detail about what is being measured and how! I’m giving the IGC an amber in the hope that they will have more courage next year and make specific comments on the various funds and default options available. I’m giving the Scottish Widows IGC an amber for Vfm reporting

you can read the original of the report here ; http://reference.scottishwidows.co.uk/docs/55358-2016-17.pdf