AgeWage: Making your money work as hard as you do

The FCA promote a secondary market in workplace pensions

It’s an obscure section of a paper that will probably be read by a relatively few people expert in pensions. If I hadn’t published it this morning it might have been overlooked as it is buried deep in the cost benefit analysis of the FCA’s9 CP20/9  Driving Value for Money in Pensions

but it’s worth some discussion.


In what cases might an IGC/GAA tell an employer the scheme they ran for members was poor value for money?

4.21 We propose that for workplace pension schemes firms require their IGCs to
consider whether any of the comparable schemes assessed in the VfM assessment process offer lower administration charges and transaction costs.

This should drive competitive pressure on costs and charges of workplace pension schemes. We are confident that IGCs will have access to such pension scheme data to conduct this  comparison once scheme governance bodies begin publishing costs and charges information on their websites following our new rules in PS20/02.

4.22 We also propose new guidance that as part of this comparison, 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.

The information referred to in PS20/02 is presumably

We proposed that provider firms must require that scheme governance bodies ensure all scheme members are provided with an annual communication which includes a brief description of the most recent costs and charges information available and how it can be accessed. This costs and charges information should include all the information set out in paragraphs 3.11 and 3.13 of CP19/10.


Should this include large employers with their own schemes?

The term “schemes” is ill-defined by the FCA and I am writing to the VFM team to discover whether it simply refers to the GPP offered to all employers on standard terms, or whether it refers to the special terms offered to employers for whom the provider has had to compete for business under a competitive tender. The terms for large employers like British Telecom from Standard Life will be very different from those offered to a start-up.

A comparable scheme to BT might be the terms on which Vodafone participate in the WTW Lifesight Master trust.  I would not expect IGCs and GAAs to be benchmarking  “schemes” which have non standard terms or funds, this is the job of pension consultants. I would expect “scheme” here to reflect the generally available terms.


A secondary market for smaller employers

The role of IGCs in escalating to employers is to make sure that employers who don’t have access to advisers, take action. PS20/06 includes in its cost benefit analysis this view of such employers.

Pensions products are often very complex, meaning that consumers struggle to
access and understand information about their pension. This makes any decision making about the value for money of their pension difficult for consumers. This lack of understanding also means that consumers have limited ability to exert pressure on their employers or providers regarding value for money.

Employers often lack the capability to challenge providers for the same reasons. There is also a lack of incentive on the employers’ side to ensure that their employees receive value for money in the long term. In DC pension schemes, employers are not liable for the final income that schemes provide for their employees, and employee turnover means that employers are further distanced from any long-term pressure to make sure their chosen pension scheme provides value for money.

The FCA is arguing for a secondary market where employers can review and replace workplace pensions. The IGCs/GAAs are there to promote change where change is needed. They cannot implement change and there needs to be a broking market for schemes as well, but they can be the agents of change.

I will also seek clarification from the FCA of the concluding paragraph

The combination of the complexity of pensions products and the misalignment of incentives for employers means that the demand side of the market for workplace pension schemes is weak. There is limited incentive for firms to ensure that their products provide value for money for their members.

Although the general sense is clear, it is as hard to work out what “firms” and “members” refer to as it is to tie down what the FCA mean by “scheme”.


Will this work?

For the FCA to see a more competitive market for savers into workplace pensions, it’s clear that employers are going to have to step up to the plate and the FCA thinks that IGCs can be the agent of change. This remains to be seen.

For the IGCs to tell the employers of the providers who employ them , to consider moving their workplace pension there will need to be considerably more distance between provider and IGC/GAA than we have seen to date. To date the FCA report only two instances of escalation by IGCs because of perceived poor VFM. Is there any grounds for thinking things will change?

The FCA are backing bench marking and are suggesting that where bench marking shows an IGC their provider is consistently in the relegation zone of any league table, they should demand an explanation of the manager and – should no satisfactory explanation be forthcoming – the IGC should recommend the manager be sacked.

This will only work if the IGCs become more independent, that the bench marking works and that employers feel, once prodded, that they are under an obligation to their staff to review and to change.

There are a lot of “ifs” here and having run the Pension PlayPen for 6 years, helping employers to choose workplace pensions, I am conscious that the numbers of employers who give a damn is quite small. There are relatively few advisers in this sector and those advisers who are active depend to be vertically integrated , typically advising employers to consolidate to their proprietary workplace pension.

Actually this is not a bad model. If advisers are to be incentivised to reach out to employers , they must have a means of getting paid and the accumulation of funds under management is a good way. Providing of course that the workplace pension run by the adviser is itself giving value for money.