To understand why the Prudential’s IGC reports are so good, you need to go to first principals and read the opening paragraphs of their value for money definition (oddly sitting on p40 of 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.
On the basis that good financial outcomes that lead to higher retirement income are the most important, we prioritise investment returns and charges as being the most important elements of VfM. We then look at a number of secondary service quality features, placing particular emphasis on the swift and accurate processing of contributions, the level of performance in dealing with complaints, and the quality of communications.
This is the 7th report I have reviewed and the first that specifically mentions retirement income as part of its value for money assessment.
Of course, workplace pensions do not produce retirement income in themselves – (though CDC pensions will); but in terms of their tax treatment, they are expected to replace income lost when people grow too old to work at former levels.
Prudential’s IGC Chair, Lawrence Churchill knows this. He also knows (and states)
The major factor in how much pension you can take out, is how much you put in.
The Prudential have had a bumper year for inflows and I will look at why in this report.
Value for money
The report ends well but it starts well too, clearly setting out the IGC’s view of what is working (and what is not).
Sadly, I cannot reproduce the original, but you you can click on it here. Each segment provides you with its narrative at a click of a mouse. Certainly the most engaging use of digital technology I’ve encountered and representative of the high level of engagement I had from this report (see below).
Wise bird that he is, Churchill then assigns each sector to one of his team. Particularly impressive is the report by John Nestor on investment matters which deals very properly (and in the IGCs own words) with Environmental, Social and Governance (ESG) issues.
Prudential are retaining their (outcomes based) CPI+3% performance benchmark and this is regularly referenced. Where performance charts are included, they show the performance against relative benchmarks.
Of particular importance to me was the statement on with-profits.
With £1.2bn of funds under the IGC remit being invested in With Profits, we undertook further research into the charges for guarantees and smoothing. This showed that the charges were less than could be supported theoretically. Importantly, we also confirmed that if the charges for guarantees were excluded, all the with-profits funds were charging 1% or less for investment, in line with our reference point for unit linked funds. There are consequently no concerns about the Value for Money members are receiving.
“Prufund”, the commonly used name for the Pru’s With Profits, is mainly used for people transferring out of DB plans. It is recommended by advisers because it provides stability through a smoothed investment return.
In my opinion, the IGC should be considering whether the use of Prufund in this capacity falls within the remit of the IGC. My argument is that while the money is being transferred into non-workplace pensions, the source is workplace, albeit a DB plan.
The statement from Nestor deserves wider distribution to IFAs as it clearly states a methodology that can be used for determining VfM in with-profits. Let’s hope that Prudential can go further and clearly identify the cost of guarantees in all their with-profits products, so other third parties can follow this method.
Prudential have gone so far as to provide underlying performance data for Prufund
I will be recommending that the Friends of CDC look at the quality and quantity of these disclosures. While CDC is not with-profits, it can learn from Prudential and its IGC.
There are other reports on transaction costs, communication and service levels which are also good. I found the Prudential’s section on Value for Money, outstanding, and the best I have read. I have no difficulty giving it a green (in Pru’s terms – it should get a deep green).
There is a sureness of touch in this report, matched only by Phoenix’s (of those I have read so far). The use of appendices is tried and tested, it leaves the main report tightly focussed on the job in hand.
The links are engaging as are the graphics but it is the tone that marks out this report as special.
Engagement leads to confidence and confidence to use, if the IGC can be immediately useful, it is most immediately useful as a way of encouraging people to save and keep saving in pensions.
By this yardstick, I am giving the report a green for engagement, if I was a Pru saver, I would be considering upping my contributions having read it!
The report doesn’t mince its words; on the massive range of funds that were within the workplace contracts, it has this to say.
Members have been able to invest in 129 different funds. We regard this number as far too high for Workplace Pensions, and see little sign of customer demand or need for many. For example, 71 funds have fewer than 500 members investing and 72 funds have less than £5m invested by workplace pension members. In addition, a number of funds seem to be doing pretty much the same thing.
We believe there is an opportunity for Prudential to simplify its fund range and reduce its costs by reducing the range of funds offered. As set out above, 23 funds will have closed in the last 18 months, simplifying Prudential’s proposition and
delivering better Value for Money for members. But 106 funds still remain. We are challenging Prudential to make much more progress in 2018.
Not only is this a very effective piece of writing, it is indicative of the confidence that the IGC has in itself and in its relationship with the Prudential. I got , throughout this report, a sense of a functioning relationship with Prudential.
Churchill had boasted about the effectiveness of his IGC in the trade press and I was up for taking him on. I won’t, I suspect he would be able to defend his position as he defends the policies of his members.
This is an effective report and I will give it a green for that too, it is the report of an effective IGC.
This is the first report I’ve read this year (I’ve read eight) that I would be proud of having been a part of. Others have been good in parts, but this is good all over and it gets three greens from me.
Consultants, trustees and other IGCs would do well to mark it.