With most of the first IGC reports published, Michael Klimes evaluates the key developments so far
- IGCs are the biggest shake up in the running of contract-based schemes for a number of years
- Most have published their first reports highlighting the same themes but they have made different policy recommendations to providers
- Time will establish what best practice is in the future
Perhaps the most significant reform to the running of contract-based schemes in the last couple of years has been the introduction of independent governance committees (IGCs). Since April 2015 any provider of a contract-based scheme has been required to establish an IGC.
These bodies have two objectives: ensuring schemes are managed in the best interests of members and challenging providers if they are not giving value for money. They must have at least five members, including one who is a representative from the provider. Each member can only serve for ten cumulative years.
IGCs in firms, ranging from an insurer like Legal and General (L&G) to an asset manager such as BlackRock, have released their reports. They touch on the same themes but in different ways.
There is shared emphasis on defining value for money in a manner that resonates with members, extracting data for obscure legacy products and tackling transaction costs.
However, the length of these reports, their level of intelligibility and stance on various charges is diverse. For instance, Prudential chose to axe exit fees following recommendations from its IGC while Standard Life chose to cap exit fees at 5%.
IGCs can only fulfil their obligations by understanding their members and this can only happen if IGCs have access to the data they need. For instance, data underpins any assessment of transaction costs, value for money and legacy products in governance statements.
PTL director Richard Butcher (pictured above) who sits on the IGC of Standard Life admits surprise at the ease with which the committee has been able to get data.
"Contrary to popular opinions, insurers are not trying to rip their customers off," he says. "They all want and are fundamentally trying to do a good job. We must bear in mind they have a number of customer bases to serve. All the insurers I have seen have approached the process in a positive way, but they are subject to constraints like legacy products and systems. Is it perfect yet? No. But will it lead to better member outcomes? Yes, it is a policy success."
Two ways of ensuring an IGC gets access to data is being pragmatic when talking with their provider and starting data collection in good time.
"Start everything early because the whole process has taken a surprising amount of time to be done properly," Butcher continues. "Whatever you are doing assume it will take you longer. The second thing that is consistent with trusteeship is being pragmatic and being sensible about things. Generally steaming in and saying ‘we want you to cut your costs' is not smart. You have to be sensible in your negotiation and constructive. You have to find the give and take and reach compromise where the outcome is good for members and the insurer."
While good planning will help deal with the sheer volume of work, mining data for legacy products is proving particularly taxing according to Prudential IGC chairman Lawrence Churchill: "The key issue with a large organisation is how do you get to people in the know? This is not an easy process. We had to go in and interrogate old fashioned legacy computer systems. One of the lessons I learned is I forgot how hard it can be to access these old legacy systems and produce the data and manage the information in the way you want. It does take a long time."
Value for money
Another issue is defining value for money. Zurich's IGC has persuaded the insurer to commission ORC International to do research of its customers on their perceptions of value for money. It will report back towards the end of 2016. It is estimated this will eventually cost somewhere between £100,000 to £200,000.
The IGC argues this supplements strong consumer representation on the IGC board itself with Anna Bradley and Robert Laslett. Bradley is a chairwoman of a number of consumer oversight bodies and is currently chairwoman of the Rail Safety and Standards Board (RSSB). Laslett is a member of the Civil Aviation Authority Consumer Panel and was a chief economist at the Department for Work and Pensions. It is hoped that having a board that has people with different experiences and perspectives can make them more potent in holding their provider to account.
But even with the consumer research, demands of the work placed on IGCs means the journey towards defining value for money is a long one, says Zurich IGC chairman Laurie Edmans: "I have learned how difficult it is to get a clear view of what value for money is on a broad basis rather than just being limited to how much are the charges."
He continues: "The only person who can really tell you they have value for money is the person at the point of retirement. You ask them: ‘are you getting what you expected [in terms of income]?' It can be as much as they expected for retirement and a good solid income for their last years or less than they expected but not a surprise. I think it is vitally important people understand where they are. In that way they can plan."
Defining the value for money concept in the chain between the member and provider is immensely complicated. It cannot simply be done through looking at charges, Edmans contends. Butcher agrees and says: "Value for money is wholly subjective. Even if it is a systematic approach to looking at value for money, it is still subjective."
If explaining value for money and mining data from legacy schemes is a challenge, transaction costs are a nightmare. Churchill observes: "I think it will break down into two sets or possibly three. Those that are reasonably easy to get and then those charges that are at the other end of the spectrum. We will get stuff that is completely inaccessible like the rates at which as an active fund manager invested, for example. There are some very elusive questions that will probably fit into the ‘too hard to do box'."
Yet Churchill is optimistic Prudential's IGC will make progress in the trickiest terrain of the IGC landscape. "Whether we like it or not we will have to say something coherent at the end of next year. We will gradually move into the area. Maybe transaction costs, if taken all together could, be a drag on investment returns. So we have a duty to look at it."
Influence and the future
Edmans, Churchill and Butcher all think the IGCs have been influential and worthwhile but still have a lot of work to do. Their ability to blow the whistle on dismissive providers to the Financial Conduct Authority (FCA) is a powerful tool in their arsenal.
In a note put out by the Pensions Policy Institute, the think tank listed a number of areas that require attention in the future. These include further oversight on value for money and appropriate benchmarking across the market place, better grasp of transaction costs, and more interaction between the members and IGCs.
In addition, it listed transferring those in older schemes to more modern platforms, focussing pressure on providers with regards to pricing and digital access for members and, in due course, coverage of the retirement process and outcomes for members.
Churchill believes time will iron out some common touchstones around best practice in contract-based schemes: "What we will begin to establish over time is a more consistent standard of what ‘good' looks like," he says. "What does a ‘good' charge look like? What does a ‘good' investment return look like? What does a ‘good' communication look like? It won't be a one-size-fits-all. No-one is going to put down a template that is compulsory for everyone. The nature of the subject is much too fluid for that.
"But I do think over time we will see a consensus and alignment developing around what 'good' looks like. It might take a couple of years but once you get there you will see the FCA harvesting that and saying 'we have looked at what you have all done, there seems to be areas of good practice here, this is what they look like'. And they will gradually start to say to people who are not complying with those standards, 'will you tell us why not?'"
With so much work for IGCs left to do, it is probably wise to give those who sit on them words of encouragement.
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