This blog is a follow up to my piece which asks whether the FCA has let the IGCs off with impunity.
The FCA has chosen not to publicly humiliate failing IGCs but to give them clear guidance for the future. After 5 years of non-intervention on value for money, the FCA has clearly decided that enough is enough.
The measures that IGCs will have to take in future will be prescribed and monitored by the FCA. I suspect that being an IGC Chair and member is going to be a lot tougher going forwards.
The FCA’s new bench-marking requirement
In its value for money consultation, the FCA have radically shifted their position on value for money. Previously this was a measure to be understood by savers but this new work suggests that it is employers who will be acting on IGC VFM assessments.
There has also been a change in terminology with “savers and consumers” being replaced by “members”. The FCA has started to refer to “schemes”. AgeWage wrote to the FCA asking what “scheme” referred to (in the context of CP20/9).
The FCA responded
” In this context, schemes means anything in scope of the IGC or GAA – so workplace personal pensions.”
AgeWage asked whether a workplace pension scheme could have (sub) schemes within it.
“Where employers have their own terms and/or funds within a GPP of SHP book, is that too a scheme?”
The FCA responded
” Yes, we mean something narrower than the ‘scheme’ for HMRC purposes – in order to be meaningful we need the IGC to obtain data on what each employer’s scheme is achieving for its members. Clearly there will be some need for proportionality here – where members have chosen a fund for themselves (usually in small numbers) it is less important that the IGC looks at VFM than that it considers the VFM of the default, for example.”
Within CP20/9 , the FCA expand on the impact of an IGC telling “what each employer’s scheme is achieving for members” .
For workplace pension products, our proposals should lead to IGCs/GAAs
telling employers if firms are not offering VfM and there are better options elsewhere.This should lead to employers switching their workplace pension scheme to a different provider, so that their employees receive better value pensions products (Annex 2; cost benefit analysis 40)
Turning to the main body of the consultation, we see the FCA’s moving towards bench-marking
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. But this review of other options should not form the sole basis of an assessment.
4.14 So, we propose new guidance to define VfM in the context of the IGC assessment
process: 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.
4.15 The scope of this comparison would be a matter for the IGC. For workplace
pension schemes, this could include not-for-profit options such as NEST or The
4.16 We do not expect IGCs to have the time, resources or expertise to compare all other options on the market. This would not be cost effective. In practice, we expect an IGC to pick a small number of reasonably comparable schemes or investment pathways including those that could potentially offer better value for money (against the factors set out in the rules), to conduct their assessment. When selecting comparable schemes, we expect the IGC to take into account the size and demographics of the membership.
4.17 This comparison with other comparable options on the market applies to the extent that information about those options is publicly available.
4.18 In relation to schemes only, we propose that firms require their IGCs to state in the annual report the reasons why the comparable schemes selected provide a reasonable comparison. In future, we would like to see the emergence of suitable benchmarks to make a reasonable comparison easier
Is comparing “Employer Schemes” a practical idea?
These comparisons present considerable difficulties for traditional VFM methodologies. We expect to hear push back from IGCs arguing that there being no consistent definition of VFM across schemes nor a single benchmark of performance, a comparison of say NEST with the Standard Life GPP is very difficult.
At present the FCA seem to be saying that the comparisons of schemes would be using the methodology in PS20/2: Publishing and disclosing costs and charges to workplace pension scheme members and amendments to COBS 19.8
But this is only possible where the costs and charges are at the “relevant scheme” level (and not discounted for specific employers). There is no way to work out the impact of costs and charges on “employer schemes” in PS20-02.
But employers who have negotiated their own charging structure and/or default fund are entitled to know if they are getting a good deal and should welcome the FCA’s position. We know that employers have difficulty getting reporting at “employer scheme” level and we have had difficulty getting data from insurers and master trusts for the employer.
The employer finds themselves with little negotiating power should master trustees or the GPP managers choose not to provide data. We would hope that the FCA’s position will prompt the owners of data to be more forthcoming about sharing data with organisations that set up “employer schemes”. However, we see little hope that PS20-02 will help IGCs or employers and even if scheme specific charges could be worked out for every employer scheme, what good would it do.
The question remains whether a meaningful comparison can be made between an employer scheme in (say) the Legal General GPP and an employer’s scheme in (say) the People’s Pension master trust.
How could two employer’s schemes be selected and what would be the basis of comparison?
Thinking about “comparable schemes” takes us into underwriting territory. An insurer will typically look at employer schemes as comparable (for pricing purposes) if they have roughly the same assets , members and contributions per members.
It is not hard to create a database of employer schemes from within your workplace pension of master trust that can be searched for . Insurers and master trusts that offer underwritten terms to employer schemes could share such a database with their and rival IGCs and indeed with master trustees.
Alternatively such a database could be set up by a consultancy or a data-gatherer such as my company – AgeWage. We would argue that there are no practical obstacles to setting up a database of anonymised employer schemes that could allow IGCs to make fair comparisons
The enemy of VFM assessments is diversity. The diversity of approaches to establishing VFM frameworks has meant that almost every IGC has been able to claim they have provided VFM. This isn’t hard if you’ve been able to set the questions and mark your own schoolwork.
But the FCA is looking for comparisons that are “meaningful” . Specifically they are suggesting in the mail send to me that “in order to be meaningful we need the IGC to obtain data on what each employer’s scheme is achieving for its members”.
Here comes the AgeWage ad!
We at AgeWage have long-argued that what is meaningful for members is a good outcome. A high quality of service is of course a good thing but you can’t eat service. For too long service has been used as a smokescreen to hide poor performance and high charges. It is the get out of jail card for the lazy IGC.
If we exclude quality of service then we would argue that not only is such a comparison possible , but is already in use.
The simplest way of establishing value for money for an employer scheme is to compare contributions with the net asset value of the individual’s pot. This gives a saver an internal rate of return which he/she can compare to a benchmark return by redeploying data into a benchmark fund (we use the Morningstar UK Pension index which track the prices of DC defaults going back to 1980).
By comparing the actual IRR with a simulated “benchmark”, it’s possible to create a coherent scoring system where the score represents the average of individual’s experienced outcomes relative to the average person’s outcome.
We’re building a library of employer schemes that could be searchable by IGCs and GAAs and indeed by employers looking to benchmark their scheme.
We believe that fair comparisons can be made and we intend to be in the vanguard of organisations offering to provide them.