Are employers the provider’s clients?
In financial services, the client is the entity that takes the decisions on where the money goes. Whether we define “money” as “pension contributions” or “fees paid”, the employer is seen as the client. It has the means to pay.
Are the rights of an “employer as client” properly defined?
Occasionally, the employer sets up a trust board as an arms length decision making board but the trust board is co-dependent on the employer for its future funding.
The role of single employer trust boards has been mightily diminished these past twenty years. The shift from defined benefit pension to defined contributions has reduced the need for employer trusts. Many employers chose to set up their new DC plans as group personal pensions and latterly, many trusts have wound themselves up and the savings of members have been absorbed into DC master trusts. DB schemes are now being bought out by insurance companies and it looks like many will be absorbed into DB master trusts when legislation permits.
Increasingly pension providers are looking through the trust structure and treating the employer as the real client.
Some of the largest employers in the land have no pension trustee board of their own to oversee the investment of money into staff pensions. BT, who send £450m a year to their workplace pension use a group self invested personal pension. Vodafone and Fujitsu have recently given up on trusteeship and now participate in a master trust. Tesco – though it still manages its staff money, is a participant in a master trust and has no trustee board to oversee future contributions.
Employers recognise themselves as “clients” having made the decision where to send future contributions and master trusts and insurers running their GPP see them as clients too.
But other than having the right to redirect the future contributions to another workplace pension, the rights of an employer to exercise governance, are ill-defined.
What are employer’s legal duties where it doesn’t own a trust?
The employer is only obliged by the Pensions Act 2004 to pay contributions on time. The employer also has no responsibility regarding investment decisions.
These responsibilities were extended by the 2008 Act which creates a statutory duty on employers to ensure that all eligible jobholders are auto-enrolled into a qualifying scheme, into which a minimum level of contributions must be made, and which has a default investment fund.
According to written evidence supplied by the Association of Pension Lawyers to parliament in 2012
Where employers undertake responsibility for certain functions they are doing this by way of best practice and not because of any legal requirement to do so. Unlike trustees, employers are not subject to a knowledge and understanding requirement and so are not required to possess the same level of knowledge and understanding of the law relating to pensions, investment and funding. Employers are not able to exercise discretion over the fund’s assets.
The final point is open to challenge, some employers are asset managers in their own right and self-manage their staff’s funds, even when they are not trustees – Tesco is an example.
The APL go on to point out that employers doing more than meet their statutory duties are creating extra risk for shareholders. The APL suggested that employers should be allowed to act in a “safe harbour” to ensure the investment of contributions was in suitable funds but the Government has never acted on this suggestion.
The Pensions Regulator’s powers over employer behaviour are limited
We are responsible for maximising compliance with the employer automatic enrolment duties and employment safeguards in the Pensions Act 2008 Act, as well as protecting the benefits of members of work-based pension schemes.
Instead of requiring employers to set up governance structures, tPR has focussed on making qualifying workplace pensions fit for purpose. The Mastertrust Authorisation Framework was put in place so that the 1m new small employers that staged auto-enrolment between 2012-18 can feel their worker’s money is protected.
Meanwhile, the FCA have, following a damning report about insurers from the OFT, put in place Independent Governance Committees to provide oversight of contract-based workplace pensions (GPPs , stakeholder plans and GSIPPs).
The onus has therefore shifted away from employers being responsible for the outcomes of pension schemes to their being responsible for inputs. Provided employers choose qualifying workplace pension schemes, they have no legal obligation to make sure those pensions work.
Only where the employer has in place a trust board, has it an obligation, which is why so many employers are packing in running their own trusts for workplace pensions.
How do employers assess “Value for money”?
Despite not being responsible for outcomes, employers have both a commercial interest and a duty of care to ensure the money they send to GPPs and master trusts provides value for money.
Employers who don’t have their own trusts find it hard to determine whether they are getting value for money and are dependent on annual statements from IGCs and the Trustees of Master trusts on whether their staff are getting value for money.
The FCA considers value for money as a three legged stool with performance, charges and the user-experience being the three legs.
For employers there is a fourth leg, being the capacity of the provider to administer contributions in a way that keeps the employer compliant with its duties under auto-enrolment (value) and doesn’t cost them (money) in the management time involved with pension management. For most employers , value for money assessments start and stop there and most employers who change providers do so because of the cost of working with the provider.
However, many large employers see pensions as more than compliance and concern themselves with measuring the outcomes their staff are getting. The larger the employer , the greater the resource that is generally devoted to this subject. The very largest employers (like Tesco) actually spend money on the investment of their staff’s money and measure the results of that investment in terms of member outcomes.
There are commercial and fiduciary reasons for this. If Provider A can produce the same outcomes for members for a 6% employer contribution, as Provider B does for an 8% contribution, then Provider B is only 75% as effecient. The employer can use past performance over time to establish whether staff are getting value for participating in the employer’s scheme.
Employers who can measure performance can also see where things are going wrong and express concern to providers (and even IGCs) where problems happen. For instance they may be able to spot areas where there appear to be freak results and investigate whether these are the result of staff taking unusual investment decisions or whether it’s because of failures in record keeping at the provider’s end.
It is in the interests of larger employers to do so as they consider they have a duty of care to their staff (financial wellbeing) and because they want to maximise the economic value of the money they are paying to third parties.
Data privacy for workers – a right in law!
Under old-fashioned trusts, trustees were able to see what was going on and manage problems personally, they could see who was investing what and might even intervene where necessary.
But with contract based plans, and where employers are only participating in commercial master trusts, they have no right to see individualised data. Only where a staff member makes a data request and shares data with the employer, can the employer see what has happened to a staff member’s pot. This is not just GDPR, it is because the contract is between the individual and the provider or the member and the trust.
This is generally accepted as the downside for employers of outsourcing governance and is expected. As far as I know, employers do not put pressure on providers to break confidences and if they did, the provider would need to whistleblow.
But do employers have the right to assess their pension’s VFM?
Where problems are arising is when employers make general data requests on behalf of all staff so they can make their own value for money assessments.
This means getting large data sets analysed by consultants (AgeWage for the moment but more may follow). A legal argument can be used to deny employers access to this data on the basis that it is not the employer’s data but the policyholder’s data or the trustee’s. The employer is neither the policyholder or has its own trustee representative.
Employers are arguing that they are asking for anonymised data on staff and that as “the client” they have a commercial and fiduciary interest in what has happened to the money they’ve sent to the provider.
There are many instances where information on the management of member records is shared by providers (many providers operate service level agreements with employers to ensure the employer can measure VFM in administration).
Providers are increasingly sharing generalised data on employee behaviour (percentage use of default, numbers of employees using the provider web portal and son on).
But data which allows employers to check the internal rate of return of staff using the provider’s scheme involves providing contribution histories and pot values (NAVs) and this data is not normally considered something that employer’s would want.
So there aren’t systems in place to provide this data and in any event , a provider can say “no” and suggest to the “client” that the request is unreasonable.
Clarification needed – consultation coming!
The FCA are likely to issue shortly a consultation on “value for money”. I hope it will consider VFM from the employer’s point of view.
If the employers is considered a client by the provider, then this suggests the client has rights and this has long been recognised. Pension Governance Committees are usual for larger employers and have long been considered best practice.
For employers who set such committees up, it is natural that they should consider whether staff are getting value for money. They can also consider how the scheme is run to ensure the employer is getting value. If they think the value is poor they can renegotiate terms or replace the provider.
If they make a request of their provider as a participating employer in a master trust or a GPP can they expect to get the data request honoured?
In AgeWage’s view – employers have a reasonable expectation of being able to see anonymised data relating to the performance of the pots of individual members and to be able to assess from this information whether there’s value for their member’s money.
But we’re pretty sure they don’t have a right to it.
In our view , the question of what is a “reasonable request” is one that needs answering. Technology is changing and data analysis is delivering value in ways no one can predict.
While employers do not have a right, where they can demonstrate that they have a capacity to make use of the data available to assess value for money, it seems both churlish and counter-productive to good relationship management , for providers to deny the request.
The capacity of third parties to analyse anonymised data is increasing too. The Open Finance initiative is designed to make data-sharing easier and more productive.
It makes sense for these issues to be part of the forthcoming consultation and we will be arguing these points to the FCA when the consultation is announced.