Have IGCs improved value for money in contract-based pensions?

Three years have passed since independent governance committees (IGC) were introduced to improve value for money in contract-based pensions to generate better outcomes for members.

The third annual reports have started rolling in from the likes of Standard Life, Aegon, Prudential, Legal & General, Blackrock, Aviva and Scottish Widows.

Most report that charges have been lowered, but more work is needed to ensure all transaction costs are disclosed.

First Actuarial director Henry Tapper says the key thing for IGCs to work out is that, "for the amount of money that they pay for their workplace pensions, people are getting a good value service."

All IGCs report that overall, most members are receiving good value for money from their workplace pensions.

Defining value

But are IGCs any closer to defining what ‘value for money' is?

When the Financial Conduct Authority (FCA) first introduced IGCs, it did not provide a definition. It instead asked them to provide their own specific definition, and produce comprehensive guidance about how to assess value for money.

Similarities have been found in how they assess this. For example, all included ‘investment' in their assessment framework, along with communication, engagement and costs.

However, there are some differences. For example, there was no mention of administration in Prudential or Standard Life's assessment framework, whereas other firms have included it.

Aegon's IGC chairman Ian Pittaway, who is also a senior partner at Sackers, says Aegon has evolved its value for money principles over the years, but it is a "moving feast and we need to ensure we are getting them right."

Some IGCs have also simplified their assessment of value for money in comparison to last year's reports.

For example, Legal & General and Aegon's IGCs have included a small diagram to present this information, which arguably makes it easier for members to digest.

Tapper agrees, and adds: "Defining value for money is cosmetically getting better, but the fundamental issues about if we can use these IGC reports to establish who's doing well, who is delivering value for money, and who isn't, is pretty tough. The consumer isn't getting that yet."

Lower charges

One fundamental theme within the reports was to establish whether charges have been lowered for members since last year's reports.

Most IGCs reported to have an annual charge cap at 1% or lower for their legacy schemes - similarly to last year - despite there being no regulatory charge cap for such schemes.

Indeed, there have been some positive movements.

For example, Aegon's IGC reported that over 1.2 million customers covering 94% of customers the IGC is responsible for - have an annual charge of 1% or less with concrete plans to increase this to 98% during 2018.

In addition - in early 2018 - the insurer completed a review of its workplace pensions programme. As a result, it ensured that over 575,000 members will not be charged more than 0.75% of their fund value each year.

This applies to all members who are paying contributions to an active scheme, unless they explicitly choose to invest in "specialist and costly funds."

Furthermore, the Scottish Widows IGC report  stated the provider has capped ‘peaks' in scheme charges applied to legacy products at 1%, as it promised to do so in last year's report. The IGC confirmed these changes were completed in 2017.

However, issues still remain.

The number of Standard Life members charged over 1% annually increased from 45,557 as at December 2016, to 57,715 by the end of last year among over two million members.

Nonetheless, it is still a major improvement from the end of 2015, when 266,684 members were charged more than 1% annually.

It is important to note that its report stated that members would only be charged above 1% if they select more expensive fund options, or pay for financial advice as part of their charges.

Scottish Widows' IGC chairman Babloo Ramamurthy, who is also independent chairman and non-executive director at B&CE, says charges play an important role in determining value for money.

"When they're high, it can have a significant effect on a pension pot over a long period of time. The IGC negotiated a cap on charges with Scottish Widows which applies to all of the company's older workplace pension schemes."

Transaction costs

In last year's reports, IGCs admitted there is more work to be done on transaction costs, as despite some progress many firms were using ‘best guess estimates' to come up with the figures.

Have there been improvements in the past year? In some cases, yes.

For example, the Scottish Widows IGC received transaction cost data for just under 300 funds, and costs for all but one fund within its workplace pension range were disclosed this year.

This exception was a fund of less than £3m (less than 0.01% of total assets) that invests in assets where transaction costs are not readily assessed based on current industry guidance.

This is an improvement, as last year, the IGC analysed transaction costs for just 29 of the largest equity funds used in the Pension Investment Approaches (PIAs).

As of 3 January, FCA regulated firms must supply information about transaction costs using the FCA's ‘slippage cost' methodology, as well as information about administration charges and any other appropriate contextual data.

This should make it easier in future for IGCs to assess value for money and disclose these charges to their customers - especially as most firms did not disclose all of their costs in this year's report.

For example, Aegon's IGC stated that the timing of the report meant it could not include specific transaction costs, so it asked the insurer to provide an estimate of 2017 costs for its own default fund. It stated that based on the estimates - costs were less than 15p per £1,000 fund.

Sackers partner and chair of Aegon's IGC Ian Pittaway says: "We could not disclose all costs as we did not have time to do so from January. However, come spring 2019, we will have had enough time to get that information under our belt."

Meanwhile, Standard Life informed the IGC that it has been unable to access all of the data required to provide full transaction costs given the "wider industry challenges" around the capturing and distribution of source data such as ‘arrival prices.'

It provided its IGC with ‘aggregate transaction costs' for its core default funds, and found the costs fell within 0 basis points (bps) to 12 bps.

This is an improvement from 2015 - as ‘estimated figures' showed that yearly transaction costs for the core default funds were within the range of 10 bps to 20 bps.

Prudential IGC's analysis of around 85% of unit-linked funds found just over 60% of funds under management had transaction costs of less than 0.1%, and a small increase for the flagship default fund from 0.07% in 2017 to 0.09% in 2018. The transaction costs were broadly the same as reported last year, using the IGC's own methodology, as some asset managers were finding it difficult produce the results any quicker under the FCA's methodology. However, two funds covering 1% of Prudential's funds under management charged more than 40 bps.

Meanwhile, the Scottish Widows IGC noted transaction costs were higher for actively managed funds that invest in a smaller number of assets that are regularly reviewed by the fund manager and can involve higher levels of trading. Of the 291 funds analysed, 13 had transaction costs over 50 bps.

The higher the number of transactions within a fund's strategy - or the portfolio turnover rate - the higher the transaction cost level. Passive investment generally incurs fewer costs than active.

Commenting on the Scottish Widows findings, Ramamurthy says: "The level of transaction charges at this point is not giving the IGC cause for concern."

However, Tapper says in general, transaction cost disclosure is still not at the level it should be. "I've had lots of arguments and conversations with people and they agree we need to find a way of fully disclosing all of the costs that members have, if we are to get to a fully inclusive cost calculation."

Moving forward

All IGCs provided information for planned improvements for next year's reports. Aside from all stating they will disclose transaction costs - the IGCs also promised to improve efforts to provide value for money to members.

For example, Aegon and Scottish Widows said they will modernise their systems to achieve this.

The Scottish Widows IGC said these changes should improve value for money in the future and "better inform customers who are considering whether they should switch to a different type of product."

Meanwhile, Aegon will continue to move its customers to its modern digital platform called the ‘upgrade programme' - which was introduced last year to ensure all customers benefit from the governments restrictions on charges within workplace pensions.

The IGC stated it will ensure all members who choose to upgrade "clearly receive value for money."

Nonetheless, some industry experts say IGCs are missing some fundamental points which must be mentioned next year.

First of all, some reports are arguably too long - for example Standard Life IGC's report was the longest seen by PP at 88 pages, while BlackRock IGC's report was just 15 pages.

This may not necessarily engaging for members, and reports might need to be simplified in future.

Tapper agrees, and adds: "I don't see any kind of real attempt to get to grips with ‘are we doing well compared to our major competitors?'

It is also arguable that IGCs are not picking up on some of the wider issues in pensions.

Tapper continues: "IGCs should be including how we should address things like collective defined contribution (CDC), and pension transfers.

"Transfers are a massive issue as many members transferred out of their defined benefit scheme last year and none of it has found itself into non-advised products."

He further added that next year, he wants to see IGCs "getting tough on some of these topical issues and set out an agenda to deal with them."

Clearly, IGCs have made progress in delivering value for money since they were introduced. However, there is still much work to do done on calculating and disclosing transaction costs using the FCA's methodology.

Moving forward, they could also consider discussing wider issues. 

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