This is the 7th and penultimate blog , addressing the Work & Pensions Select Committee’s questions on pension transparency. This time the exam question is
Are Independent Governance Committees effective in driving value for money?
My short answer is that – for the money they have been given – they could do a lot better.
On the composition of IGC boards
In as much as…
- IGCs have become an effective diversifier of revenue streams for firms of independent trustees.
- IGCs are successfully integrated into insurance companies business as usual procedures
- IGCs offer an alternative to trustee and non-executive roles for those seeking “portfolio careers”
IGCs are failing.
For too many IGC board members, the diurnal tedium of later life is alleviated by days out at insurance company expense, IGC boards are full of the wrong people – people who are too old, too male and too steeped in the failings of the past to understand the opportunities of the future,
After blogging a complaint about the ineffectiveness of the L&G IGC, I was called into L&G’s office to have it explained to me (by senior executives) the factual inaccuracies that underpinned my criticisms. Neither or the supposed inaccuracies resulted in me changing my mind or my blog, I maintain I was right.
At the end of the meeting (lecture), I mentioned that under the terms of my contract, I was now free to be an IGC member. The L&G execs thought I was joking – I wasn’t.
The fact is that people who are genuinely interested in transparency are not getting onto IGC boards. Instead IGCs are being packed with “trophy” members who appeal to the vanity of the insurance boards, but who have neither the energy or the motivation to genuinely shake the tree.
It would appear that the open place at the L&G IGC will be filled by a “big-hitter” – or so the executives would have me believe. I thought “more trophy”. I expect L&G are spending a lot of money getting big hitters to the IGC board, but the recent output – in terms of effective governance – has been poor.
By comparison, an IGC with a relatively small budget , like that of Phoenix, seems to be consistently punching above its weight. It strikes me that the Chairs of IGC boards are critical to their success and that many boards have chairs who are not up to the job.
On the effectiveness of individual IGCs
Each year I read (at least once) around 20 IGC reports and a further 10 or so GAA reports. Some of the GAA reports are very important (that of St James’ Place in particular-why a pension provider with £90bn under advice doesn’t have an IGC is a mystery).
Each year I mark the reports and publish the scoring. I blog my reasoning and I know that many of the IGCs read these blogs. In the absence of much feedback elsewhere, my blog has become a part of the reporting season. Here is the table of the reports I have done since the inception of IGC reports in 2015-16.
There are IGCs which are effectively reporting. Probably the most effective – consistently – is the Prudential’s. Some IGCs are getting more effective (Royal London) and some are slipping back (L&G). Some are consistently average (Fidelity) and some are consistently poor (Black Rock).
As we consumers have no other way of assessing the IGCs than reading their reports, we must take the reports as a proxy for the IGC’s performance.
IGCs are invisible to the people they serve
I don’t know if the FCA do polling on IGCs, but I’d be surprised if much more than 1% of those in workplace pensions know what an Independent Governance Committee governs.
In its recent inquiry into pension freedoms, the Committee chair had the chance to look at how the British Steel pension management and trustees related to their members. He concluded that the two were in different countries. I suspect that the pension management assumed this to mean that being Scottish, they were too distant from the steelworkers in Wales. I took this to mean that the members of BSPS were sorting out their issues on Facebook – while the management and trustees were devising a paper based communication plan.
The same can be said of IGCs, they are in a different country from their members. Members are spending their time getting information from Facebook and Instagram. Younger members get news from Snapchat or Buzzfeed. Static websites are seldom if ever visited. The work of the IGCs goes un-noticed by all but a handful of policyholders.
The efforts of the IGCs to talk to members are pretty well non-existent. In 2015, L&G decided to run a member’s forum, but the only people who show up are advisers and industry commentators. Some (like me) happen to be L&G policyholders but this is incidental, ordinary members are not going to go to the City of London in the middle of a working day to be lectured about the value of their workplace pension.
If IGCs want to enter into a dialogue with members , they should be looking to create digital forums like the Facebook pages of the British Steel Pension Scheme. They could do this by working with large employers to create employer specific forums and with smaller employers to create multi-employer forums. IGCs will become relevant – when they become visible – right now they are invisible which suits insurers very well.
IGCs can remain low profile – so long as they understand the issues.
My recent complaint against L&G’s IGC, was that it turned a forum into a lecture. those people who had turned up , came clutching questions and the meeting had 10 minutes out of 120 for Q&A.
IGCs have not yet established mechanisms to hear first hand from either members or their employers. When it comes to the nuts and bolts of auto-enrolment and workplace pension saving, the IGCs therefore have to guess at the issues, or be guided by large employers – who have available resource to have individual meetings with the IGCs.
In Britain today, we have over 1m participating employers in auto-enrolment, but all but a handful are excluded from the IGCs knowledge and understanding.
Do IGCs understand Value for Money?
The import of the IGCs failure to engage with the policyholders and employers they represent, is that they have no real authority. Unlike Unions who speak for their membership, IGCs can speak only for themselves.
Unless they have clear evidence of what their members want, their lobbying for change will be seen by shareholders as spurious.
As for their task of telling members whether the members are getting value for money, I can see no evidence that the IGCs have any consistent measure for what value for money is.
The Prudential use an outcomes based measure that looks at fund performance against an inflation related benchmark. Others appear to be using performance aligned to the costs members are incurring and others use less quantitative measures, relying on independently managed surveys carried out by marketing companies.
In three years – only one IGC – has told its insurer that it is not giving its members value for money (or at least has committed this to an IGC report). That IGC was that of Virgin Money in 2017-18. By and large, the reports conclude with the Chair affirming that in the Committee’s opinion “xyz” has delivered value for money.
What kind of benchmark is being used is not clear. It is like the a football club chairman saying that in his opinion his club was worthy of promotion.
Until some proper system of benchmarking is in place, insurers will (as old Mr Grace would say) – “all do very well”.
Do IGCs deliver value for money?
Charged as they were by the FCA , with implementing a cap of 1% on exit charges from workplace pensions , the IGCs can take some credit as enforcement agents. Incidentally the Virgin Money report was focussed on the failure of VM to deal effectively with this issue.
But in terms of measuring value for money on default funds of workplace pensions, the primary duty of IGCs, they are failing. Many have yet to understand how much the defaults are actually costing members, not having been granted the means of testing hidden costs and charges by the insurers they are paid by.
If this persists into the 2019 reporting, then I hope that those IGCs who still (after five years of trying) , have yet to have this basic data, will report their insurers to the FCA as Virgin Money’s did.
As regards “value”, IGCs who persist in confusing “member experience” with “member outcomes” should be reported to the FCA for dereliction of duty.
It is all too easy for the marketing departments of insurers to pull the wool over IGCs eyes with talk of “portals” and “member journeys”, “modellers” and “Gamification”, but this is all cheap to deliver smokescreen.
It is time that the policyholder is given a clear value for money score on their workplace pension as a whole, with evaluation of the plan’s capacity to deliver “to and through” retirement and an assessment of the risk adjusted performance of the plan in one holistic number. Anything more complex will simply not make sense to members.
By reporting simply and holistically against clear measures, we may be able to start comparing one workplace pension’s VFM against another.
IGCs cannot in themselves – improve the member’s VFM. But they can put pressure on insurers to lower charges, improve funds and make it easier for policyholders to save and spend their money.
In order for them to do this they need to demonstrate they represent the authentic voice of the policyholders, they have a proper view of what they consider value for money and that their assessment is based in quantitative fact and not in the eye of the insurance company’s marketing department.