The FCA’s relationship with workplace pension providers for whom they have oversight (e.g. the providers of group personal pensions and group SIPPs) has clearly deteriorated over the past 15 months, as has its relationship with their Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs).

In June of last year, the FCA delivered an unflattering verdict on the effectiveness of IGCs. Their finding were summarized in TR20/1:

• we saw wide variation in the way IGCs operate, leading to different outcomes for members of different workplace personal schemes

• we had concerns about the independence and level of challenge provided by some IGCs, making it more likely that members would receive a poor outcome

• other IGCs were operating effectively, maintaining independence from the firms whose pension schemes they had responsibility for, delivering better outcomes for pension scheme members

• we found that GAAs operated by third-party firms on behalf of pension providers were less effective at delivering meaningful improvements in value for money

• over the period of our review (2017-2019) we found there had been a small reduction in charges across all pension savings, although this cannot be directly linked to the work of IGCs and GAAs

The paper concluded with a warning

We expect providers and IGCs to work together to improve value for money for workplace personal pension scheme members.

But the IGCs have not worked together as last week’s statement on cost/charge data showed

In February 2019, we consulted (in CP19/10) on requirements for workplace personal pension scheme providers to publish costs and charges data, and made final rules (in PS20/2) in February 2020.

The first publication of data under these rules is expected to take place this summer, when Independent Governance Committees (IGCs) publish their annual reports.

We’ve since received correspondence from firms and have held discussions with both firms and IGC members. These discussions have revealed different views among stakeholders as to whether the data should be published at the level of the arrangement with each individual employer, or whether it should be published at a higher level, with the data indicating the range of charges paid by members in different employer arrangements in one overarching scheme.

Some IGCs are clearly holding out against proposals that would allow employers to see how the costs and charges they had negotiated compare in the market. But the FCA are not allowing the IGCs to fudge disclosures to employers.

We don’t consider that aggregation of costs and charges at the level of an overarching scheme would promote meaningful comparisons, however. Instead, comparisons at the employer level could play a useful role in helping to improve value for money in workplace pensions.

By digging in their heels they are now exposing their providers to a new disclosure which offers employers the opportunity to renegotiate charges to a lower tier, in the  knowledge that they could have done better.

IGCs and GAAs can escape the wrath of the FCA if they

• disclose each set of costs and charges that they levy (and the number of employer schemes which have these costs and charges), or

• show the distribution of costs and charges by employer arrangement in some other way, for example by dividing the range of charges into deciles (ie without also disclosing the relevant employer or scheme details against the particular costs and charges)

So much for the “money”, what about “value”

Although last week’s statement focused on cost disclosure, it also dealt a sideways blow to IGCs on value for money disclosures. IGCs, you’ll remember are being expected to do more on this and specifically

In addition, we consulted in June 2020 (CP20/9) on rules that set out how we expect IGCs to assess the value for money of workplace personal pension schemes and investment pathway solutions.

We said that we expect IGCs 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 these schemes, we also said we expect IGCs to ‘take into account the size and demographics of the membership. This comparison with other comparable options on the market applies to the extent that information about those options is publicly available.’

The rules being consulted on in CP20/9 were not pre-determined but left at a high level. The FCA suggested that IGCs and GAAs

• Take into account 3 key elements of value: charges and costs; investment performance; and services provided (including member communications).

• 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

The benchmark for cost and charges is obvious, it is drawn from market data that will become available following this summer’s IGC and GAA disclosures. Employers will be able to benchmark their costs and charges not just against those of other employer schemes with their provider but against the schemes with other providers.

But VFM is about the outcomes members get and a measure of net performance and of quality of service has yet to emerge that can be properly benchmarked. This despite the central focus of CP20/9 being to establish a common definition of value for money.

In my opinion, a common benchmark for performance and service quality cannot emerge from a top down analysis, such as suggested by net performance templates issued by the DWP in annex e: statutory guidance: value for money and consolidation

This is because measuring performance on individual DC pots has to be done bottom up, looking at the aggregate of member rates of return (IRRs). Trying to pin down performance at aggregate scheme level is as hopeless a pursuit as declaring charges “top down”.

The VFM assessment starts with what the individual member gets and needs to be reported using data relating to the timing and incidence of member contributions relative to the net asset value of the member’s pot on a given day. Since that NAV is inclusive of all charges, all costs and all risks and rewards earned by the scheme on behalf of the member, it is a true measure not just of performance but of quality of service.

Have the IGCs piloted this concept of VFM?

The answer is yes, but not universally. While some IGCs  and GAAs have embraced VFM reporting on the basis of benchmarked IRRs, many have not.

Considering the urgency of the FCA’s review of IGCs and GAAs in June of last year, I find the reluctance of many IGCs and GAAs to embrace a new approach surprising and disappointing.

The DWP will publish a new version of  its annex E guidance later this month. We will see whether it embraces alternative approaches to Net Performance based on actual rather than simulated experience.

In the meantime, I would impress upon IGCs that AgeWage has comparative data on VFM for, sole-employer trusts, master trusts ,GPPs , GSIPPS and stakeholder pensions and while we cannot disclose the sources of the scores, we can provide comparative VFM scores by cohort (scheme assets and membership).

Still time.

IGCs and GAAs wishing to avail themselves of necessary benchmark information can contact me at henry@agewage.com . We would be delighted to carry out assessments of sample data to include providers not as yet in our benchmarking compass.

An example of an AgeWage benchmarking report