A fourth round of IGC reports has emerged and they are looking quite different to last year following regulatory change. Kim Kaveh looks at the key findings.
Four years have passed since independent governance committees (IGCs) were introduced to help improve value for money in contract-based pensions to generate better outcomes for members.
In this year's reports analysed by PP, IGCs noted value for money had improved generally - with greater transparency on costs and charges. Nonetheless, challenges remain with investment returns amid stock market challenges and Brexit.
PP has analysed reports for: Legal and General (L&G), Scottish Widows, Aegon, Standard Life, Royal London, ReAssure, Virgin Money, Aviva, Standard Life, Fidelity, Zurich, Old Mutual Wealth, B&CE, Phoenix and Abbey Life, Hargreaves Lansdown, and Prudential.
Value for money
One of the things the Financial Conduct Authority (FCA) left for IGCs to determine was their own definitions of value for money.
Indeed, the disparities in their assessments is vast. All included elements of assessing investment, administration, communication/engagement, and costs and charges, but some had additional assessment criteria such as default strategy and governance.
Meanwhile, the way the IGCs rated the providers varied. For example, some adopted a traffic light system, while others used numerical ratings or adjectives. B&CE's IGC was the only one to not have a rating system in its value for money assessment.
The number of pages in the reports also varied drastically, ranging from nearly 100 pages from Standard Life's IGC, to B&CE's seven-page report.
Costs and charges
Generally, the IGCs improved in reporting on transaction cost data. In the past, the reports were criticised for lacking transparency - which carried through to last year's reports - where some IGCs noted they did "not have enough time" to gather information from when new rules came into force.
From January 2018, FCA-regulated firms have been required to provide a breakdown of administrative and transaction costs when requested by workplace defined contribution governance bodies using its ‘slippage cost method'. Meanwhile, the watchdog also launched a consultation in February this year, setting out proposed rules that would require contract-based schemes to disclose costs and charges to members regardless.
This year, most IGCs included tables which clearly showed transaction costs which were available for their funds, with an explanation to members as to what transaction costs are. At the very least, IGC reports showed the highest and lowest transaction costs for 2018.
For example, Royal London's IGC obtained all of such information "it saw as appropriate". It said the level of detail given goes beyond that required by the FCA methodology and splits out implicit and explicit costs and also showed how these are made up.
The transparency in the reporting did vary, however. For example, B&CE's IGC did not include transaction cost data for its funds in the report. Nonetheless, it is important to note that 460,000 members of the B&CE EasyBuild Stakeholder Pension Scheme were transferred to The People's Pension, which is provided by B&CE, to offer better value for money last year. Just over 1,000 members remain in the EasyBuild scheme, and have the option to move to The People's Pension.
Standard Life's IGC noted that not all investment managers had yet provided the information the IGC needed to provide meaningful comparisons. Fidelity's IGC was also among those that said there was "limited reporting". Nonetheless, the provider reduced its transaction costs for the main parts of its funds over the course of 2018. For example, for a 65-year-old member in last year's report, transaction costs were reported to be 0.25% for every £1,000 invested, and fell to 0.15% in 2018.
Most reported transaction costs were generally low across the board.
The data across all of the funds analysed for the providers ranged from the lowest charges of Aviva's -0.21% to the highest charge of 0.91% for an actively managed fund outside of the Aegon default. Within the default, its highest transaction cost was 0.38%.
Meanwhile, the IGCs were generally satisfied with the provider's annual management charging structures, similarly to last year's reports. In the majority of cases, these charges were reported to have improved over 2018, with a majority charging a maximum of 1% for at least some funds.
This was the case for Royal London, for example, which did this for 350 plans, while Prudential only had 0.1% of members paying above 1%. Some charges were much lower than 1%. For example, Phoenix and Abbey Life and L&G had reduced annual management charges to as low as 0.5%, while Virgin Money reduced its default fund charges to 0.6% in January this year.
Investment assessments were ranked quite low in comparison to other areas in this year's round of reports.
For example, Scottish Widows received ‘green' ratings across the board, apart from its investment assessment for both modern and legacy investment products which received amber, similarly to in its 2017 analysis.
This seemed to be a common trend among other IGCs with a traffic light rating system, including Old Mutual Wealth, Hargreaves Lansdown and Virgin Money.
Some had even downgraded their ratings from green to amber, including Aegon and Royal London. For Royal London for example, savers with over 15 years left before retirement saw investment returns of -4.99%, 59 basis points (bps) under the benchmark.
So why did some get a lower rating in comparison to other areas of assessment?
For Aegon, the rating was given due to delay in receiving the information, which limited the time it had to carry out as detailed a review as it would have liked.
Its actual returns were relatively strong against its benchmarks. The IGC assessed its top five default funds where 75% of its customers invest their money. The Aegon Default fund for example - which is a passive fund - achieved a -4.8% return against a -4.6% benchmark.
Royal London blamed lower returns on a "tough time in 2018" for both UK and US stock markets. Meanwhile, others noted Brexit uncertainty could have affected fund performance. This was the case for Aegon, Royal London, ReAssure, Virgin Money, and Fidelity.
Nonetheless, there was also a lot of positivity around returns. For example, Zurich achieved a green rating for both its modern and legacy products.
L&G's IGC gave the provider's default strategy for its workplace pensions business a mark of five out of six, noting it was satisfied that its standard default strategies give members a "good balance between risk and return". The only two funds that performed slightly below the benchmark were just 10bps under, at 8.2% for five-year returns, and 5.2% for three-year returns.
Meanwhile for Prudential, the IGC highlighted that its default fund had grown by more than the IGC thought it needed to, despite a "difficult year" in 2018. For example, the £1.9bn Prudential Dynamic Growth Fund IV had performed better than the IGC had expected, with annualised returns of 8.83% over a three-year period after charges.
Some also noted there will be changes made to their defaults during 2019 to improve returns, such as Standard Life.
There were disparities among the IGCs reporting of provider attitudes towards environmental, social and governance (ESG) factors.
Most reported they either had improved, or will be making improvements to their approaches to ESG in addition to more engagement with their IGCs on the matter. For example, Aviva and its IGC will be discussing investment principles around ESG and how the funds are managed and may develop in the future, the report said.
Aviva is considering how ESG factors which already apply can be further enhanced within the main default funds, and how funds with specific ESG features can be incorporated as further choices for members.
Nonetheless, there was some negativity in this area. Although Aegon offered one ethical fund, the IGC said it should be clearer on its ESG views. Standard Life's IGC said the provider should "articulate more clearly its approach to ESG considerations in investment generally" and specifically whether an ESG/ethical default fund would become available.
Meanwhile, B&CE's IGC did not note ESG once in its report, but possibly for the last time.
The reporting on ESG could become much more transparent in next year's round of reports, as the FCA has proposed to expand the remit of IGCs to report on their firm's policies on ESG, in a consultation that opened earlier this month.
Following his own in-depth analysis of IGC reports for 2018, First Actuarial director Henry Tapper tells PP that they "continue to improve", but adds there is a "variation in the quality of the reporting; some are better than others".
In terms of transaction cost reporting, he says some organisations have made progress, with a good range of transaction costs.
"Some have gone even further. They've really dug down a vlittle bit and done a really good analysis of transaction costs."
He adds: "When you think about defining value for money, it's easy to work out what you regard as value, but the money is always the money. And if you can't tell people what they're paying for something, what's the point?"
He further notes the IGCs need to be made more relevant, by pushing the reports out on social media, for example, as they "hardly make an effort to publicise them".
"It's very important that the really good IGCs publicise these reports to restore confidence in pensions. Most IGCs are doing an awful lot of good, like bringing down charges.
"If we don't use the opportunity to promote them, the FCA will just think nobody cares and they don't matter, which will be a shame. So it is up to us as an industry to promote them."
Value for money has clearly improved in contract-based schemes as is evident in this year's reports. Indeed, some areas need improvement but given the current political climate, it is mostly justified that investments would not have performed as well as expected. Increased regulation has improved transparency of reporting, and for the better. While members will not all necessarily read these reports, IGCs have a clear purpose, and the reports will likely continue to show improvements in value for money in the years to come.
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