The FCA’s new approach to Pension Value for Money

The Backstory

Back in 2014, with the excoriating OFT report fresh to mind, the FCA made a deal with the insurers not to refer the insurers to the Competition and Markets Authority in return for those insurers operating workplace pensions setting up IGCs, some SIPP providers , smaller insurers and large insurers with small workplace pension books could work with GAAs (a small-time GAA).

The FCA describe the first five years of the IGCs performance as a mixed bag. So do I.

Yesterday the FCA produced a report on IGC performance which stopped short of naming and shaming but made it pretty clear that certain IGCs have allowed themselves to be compromised by interference from providers and that the standard of analysis of value for money has been variable. In five years , only twice has an IGC escalated a problem to the FCA suggesting that either the OFT were wrong or that there has been a miraculous improvement in insurer’s behaviour.

With the withdrawal of some providers like Zurich from workplace pensions and the merger of Friends and Aviva, the competition from insures is diminishing. In the legacy space Phoenix is hoovering up numerous back-books and is now in charge of the IGCs of Standard Life, Old Mutual and ReAssure. We are likely to see fewer IGCs going forward . But we may see more GAAs because of new requirements on providers to offer independent governance not just for workplace pensions but if they offer investment pathways for non-advised customers.

In my view, many IGCs have run cosy clubs and , as with the boards of master trusts, they have become the sinecure for a small group of pension professionals seeking a portfolio career. The FCA needs to ask questions about the procurement of new members and the small pool from which candidates appear to be picked. Let’s hope that the new GAAs lead the way.

What’s new?

The FCA have decided to take action on value for money and has launched a consultation, running to 24th September with the no nonsense title

Driving value for money in pensions

The FCA want to promote a consistent approach to assessing VfM, they
propose to introduce new requirements on providers to ensure their IGCs:

IGCs will in future have to take into account 3 key elements of value: charges and costs; investment performance; and services provided (including member communications) and….
• Assess and report on VfM, in particular through comparison with some reasonably
comparable options on the market, or if available in the future relevant benchmarks
(as this will only apply if they are available in the future, this is not set out in the FCA’s proposed requirements).
• As far as they are able, to consider whether an alternative scheme would offer
lower administration charges and transaction costs and inform the pension
provider if so. If the IGC is unsatisfied with the pension provider’s response, the
IGC should also inform the relevant employer.
• Set out their overall assessment in their reports about whether the scheme or
pathway investment provides value for money.
• Explain how they have assessed VfM in their reports and keep relevant evidence
they relied upon for at least 6 years

The FCA are also considering whether “pension providers themselves should have a direct responsibility for VfM, alongside the IGC.” I will leave this question for another day,

What does this mean?

The idea of a single measure of value for money came out of the Work and Pension Select committee’s study on VFM. I agree with the three legged stool approach being recommended where the IGC considers VFM in terms of charges and costs, investment performance and quality of service.

I also agree with its aspiration that these proposals can pave the way for the use of standardized metrics and/or benchmarks in initiatives such as the pensions dashboard or open finance and that this may help at least the most engaged consumers to take greater control of their finances.

The FCA has landed on a common definition for value for money and it appears to be laid out in 4.14

The administration charges and transaction costs borne by relevant policyholders or pathway investors are likely to represent value for money where the combination of the charges and costs and the investment performance and services are appropriate

a. for the relevant policyholders or pathway investors; and
b. when compared with other comparable options on the market.

It is quite hard to establish this is the definition as it is not highlighted as such within the paper but this is the only statement within the section that it could be.

It is too long, has too many long words and cannot be remembered, at 370 characters it won’t even fit into a tweet. Value for Money is a phrase everyone understands and Value for Money in pensions should be no different.

Perhaps it could set the industry a challenge to provide a snappier version within the 280 characters of a tweet

Benchmarking

The FCA is proposing that an IGC looks at a provider’s proposition in terms of what an employer is buying. This is a new departure for the FCA and may come out of its working more closely with the Pensions Regulator.

So in the bench marking proposals of section 4 of the consultation paper , we find references to schemes

We think it is difficult to conduct a meaningful assessment of VfM when an individual provider’s schemes are reviewed in isolation. A review of other options available on the market can provide a point of reference, and may provide better value for scheme members.

The bench marking proposals seem to be aimed at helping employers make choices, something that I have long argued is missing from the IGC’s remit and I welcome the new emphasis on thinking of value for money at employer level.

Comparing the sausage not the sizzle

The comparison of schemes is likely to introduce a new exercise for consultants who will now be able to offer their services to IGCs to provide comparisons of VFM on a “scheme by scheme” basis.

The consultation makes specific reference to not for profit master trusts such as NEST and People’s Pension as comparitors. Good luck to anyone trying to compare the People’s Pension charging structure to anything, in my last conversation with its Chair of Trustees, he couldn’t remember how his own charges worked.

But assuming we are going to get VFM league tables, it’s pretty likely that the major consultancies will be selling their services into IGCs , GAAs and indeed occupational DC trustees.

And here is what it will mean

if any scheme offers lower administration charges and transaction costs, the IGC should bring this matter, together with an explanation and relevant evidence to the attention of the firm’s governing body and, if the IGC is not satisfied with the response of the firm’s governing body, inform the relevant employer directly.

It goes without saying that there can only be one league champion and that the relegation zone will have one or two perennial losers. The question for IGCs and GAAs will be what to do if you are mid-division and more acutely, what to do if your scheme is in the bottom three.

Here we have a new participant – the employer. I can see no mention of either employer of scheme in the paper’s glossary so must assume the accepted use of the words in the pension industry. Which would suggest that IGCs will in future be looking at the value for money of a GPP scheme of an employer such as BT or Boots or Asda and seeing how it compares with a similar scheme within NEST or Peoples Pension.

There is a way to do this kind of thing but I suspect that it will not prove popular. It will require people to start paying attention to the outcomes of arrangements and not to rely on provider marketing. For benchmarking to work it’s going to have compare the sausage not the sizzle.

Escalation

Introducing the employer into the equation is interesting. Some IGCs, most notably L&G have been reporting to employers for some time, but for many, the employer is a new entity in the reporting process.

But if IGC reports are going to start including VFM assessments at scheme level, then i see them becoming much more relevant to employers who will want to see their scheme in the league table. There are of course huge questions of confidentiality here and until benchmarks are established, this looks like a very problematic area,

If IGCs discover that their schemes are in the relegation zone, are we really likely to see IGCs whistleblowing on providers to employers. So far there have been 2 escalations to the FCA in five years, enough said.

VFM or costs and charges

The paper suggests that it is only when a scheme’s costs and charges are seen by the IGC as unreasonable, that IGCs need to protest to providers and then escalate to employers. In TR20/1 about the only element of VFM discussed is costs and charges and it is clearly the area that the FCA feel easiest to assess them compared with scheme quality and investment performance.

The impression that the FCA have not really landed on a way to benchmark the more subjective elements is a little concerning. If VFM simply becomes cost and charges then we are in a race to the bottom and we might as well forget the concept of value altogether.

Paragraphs 4.25- 4.30 degenerate into a series of references to the COBs rule books and abstractions about investment that suggest there is a lot of work to do. I agree with this statement in Pension Age

Hymans Robertson head of DC governance consulting, Laura Andrikopoulos, said that although the firm welcomed the FCA’s consultation launch, it was “vital” that focus on member outcomes is not lost amongst the changes.

“Value is not only about cost, but should be a holistic assessment taking into account the quality provided for that cost, levels of company contributions, and the ultimate outcome achieved through smart investment strategies and good retirement support, she stated.

“Concentration on governance regulation and cost through value for money should not come at the expense of these outcomes.”

In conclusion

The FCA has made progress and it’s good progress. The three legged stool of performance, costs and quality is in place though it needs better articulation.

It is now acknowledging that employers should be part of the reporting process and that employers see things in terms of scheme costs rather than individual value for money.

The FCA are suggesting that a primary point of escalation going forward is the relevant employer and not the FCA and this changes the dynamics of the IGCs function.

But the paper still fails to think in terms of consumer outcomes and especially the value that most ordinary people consider “the value of the pension pot”. Similarly , the money in most people’s mind is the amount going into the pension not the costs and charges coming out.

If we are going to get to a definition which makes sense to everyone, we need one that talks in terms of value and money in the way people think of them in everyday life.