Why employers must understand the value for money of their workplace pension

good faith 3

 

Among the remedies leading from the FCA’s Asset Management Market Study was a clear recommendation

…that both industry and investor representatives agree a standardised template of costs and charges and we propose to ask an independent person to convene a group of relevant stakeholders to develop this further.

Following this, we will work with these stakeholders to consider whether any other actions are necessary to ensure that institutional investors get the information they need to make effective decisions

 

I want to focus on that second paragraph and in particular the definition, in this context of “institutional investors”

Within the glossary of terms in the Appendix of the document, the FCA defines

Institutional investor An investing legal entity which pools money from various sources to make investments.

But this is not particularly helpful. The legal entity might be thought to be an insurer or the trustees of an occupational scheme (such as a mastertrust). It might equally be thought an employer who pools the contributions of various staff and sends them to a provider to be invested.

The difference is critical as it defines who the work that the independent person leading this group is for. We know that leader is Dr Chris Sier and if there is one person I want to direct that question to, it is him.


The employer’s obligation of good faith

I think that Dr Sier is working not just for the insurers and master trust providers – and their fiduciaries – the trustees and IGCs; but also for the 1 million plus employers who will have set up access to workplace pensions for their staff as a result of auto-enrolment.

The auto-enrolment regulations define an employer as the legal entity responsible not just for choosing the workplace pension for staff but for pooling and passing contributions to the provider of investment services, each payroll period.

I define these employers however small and disengaged as “institutional investors” on the grounds of their doing exactly what the FCA define institutional investors as doing- investing “other people’s money”.

I do not justify them as institutional investors on  grounds of their knowledge.

The OFT in 2014 made it clear that employers are singularly poor at “getting pensions”

OFT

It is better argued that of all institutional investors, they are least able to carry out their duties under auto-enrolment because they are so ill-informed.


The institutional investor -defined by an obligation of good faith to others

We cannot define employers as institutional investors on the ground of their pension or investment knowledge. We need another definition.

For this, I turn to a much quoted statement in a judgement by  Sir Nicolas Browne-Wilkinson VC  in 1991 on the Imperial Tobacco pension dispute

In every contract of employment there is an implied term:

“that the employers will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee;” Woods v WM Car Services (Peterborough) Ltd [1981] ICR 666, 670, approved by the Court of Appeal in Lewis v Motorworld Garages Ltd [1986] ICR 157.

I will call this implied term “the implied obligation of good faith.” In my judgment, that obligation of an employer applies as much to the exercise of his rights and powers under a pension scheme as they do to the other rights and powers of an employer. Say, in purported exercise of its right to give or withhold consent, the company were to say, capriciously, that it would consent to an increase in the pension benefits of members of union A but not of the members of union B. In my judgment, the members of union B would have a good claim in contract for breach of the implied obligation of good faith: see Mihlenstedt v Barclays Bank International Ltd [1989] IRLR 522, 525, 531, paras 12, 64 and 70.

In my judgment, it is not necessary to found such a claim in contract alone. Construed against the background of the contract of employment, in my judgment the pension trust deed and rules themselves are to be taken as being impliedly subject to the limitation that the rights and powers of the company can only be exercised in accordance with the implied obligation of good faith.

The judgement has been heavily relied upon in recent judgements concerning IBM and the BBC and is relevant here.

I regard employers as institutional investors as they take decisions on behalf of others (their staff) about the workplace pension available to those staff. They are responsible for pooling contributions for investment and they have an implied obligation of good faith to do this properly.

So long as this obligation of good faith exists, the work of Dr Sier must be to ensure that not just the providers trustees and IGCs know what is going on, but so do the employers who participate in workplace pensions.


Why does this matter?

Some will argue that since the IGCs and Trustees know the matter of Dr Sier’s endeavours, there need be no further disclosure. To some extent this was the position that the OFT adopted in 2014. In 2014, the reporting of value and money in workplace pensions was not even at base camp, there was a mountain to climb. We are now approaching the top of the mountain and the FCA are wanting to report a single charge that does capture the costs within the fund

oft-true-and-fair

The OFT did not (I suspect) suppose that over three years after the publication of its report, we would still be working on how to present costs to IGCs, trustees, employers and members. They could not have anticipated how IGCs and trustees would be operating today and how auto-enrolment would have gone. Overall, things have gone better than planned and the confidence of the FCA’s position in approving a single charge reflects a feeling that consumers can and should be aware of what they are paying. This goes beyond the position that was adopted by the OFT and I applaud it.

It does not make sense to present a single charge, inclusive of transaction costs,  to the public, but not make clear how that charge has been calculated and what is in it.

Nor is it responsible simply to report “money” – “value” by way of what’s been delivered, also needs to be reported. Not just simple fund returns but risk-adjusted returns that show what has been achieved with the money spent. That is how people can assess value for money.

It matters that employers can follow the argument and while they may be guided by trustees and IGCs over whether they are getting value for money, they are responsible – in the final call for the pooling of contributions and where they go. This is their “implied obligation of good faith”.

To deny employers the status of institutional investors and to simply report “money” and “value” to IGCs and trustees is to leave employers with obligations but no means to fulfil them.


“A legal and moral obligation of good faith”

I have made this argument many times before, and I have wanted them extended. Dr Sier will be aware of the amendments of the Pension Schemes Bill proposed by Alex Cunningham , the shadow pension minister earlier this year. I have written up the debate as it appeared in Hansard.

I had argued that the phrase “duty of care” should have been used in the subsequent Act to ensure that employers paid attention to the pension. In the end, both the Government and Opposition agreed to drop the amendment but the debate assumed that the employer’s obligation of good faith was implicit.

My worry is that – should the definition of “institutional investor” only include those “experts” responsible for the investment of the money (and its over site), ordinary employers will have no means to find out what is going on with the workplace pensions into which employees will be paying 8% and upwards of band earnings.

This may be what the “experts” see as desirable, but it is not what ordinary employers should see as in their interests. They are ultimately carrying an obligation of good faith and need to be able to exercise their judgement as to where the money they pool goes.

They have an obligation of good faith to their staff and we must empower them to use it.

 

 

good faith2

Another way of putting it!

 

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in actuaries, advice gap, NEST, pensions and tagged , , , , . Bookmark the permalink.

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