From April 2015, all firms that operate workplace pension schemes have been required to establish and maintain an independent governance committee (IGC), which has a clear duty to act independently of the business. All IGCs must produce a publicly available annual report setting out information on the schemes’ value for money and how the IGC has complied with requirements to act in members’ best interests. The first of these are due to be published in April 2016.
What are the latest developments with IGCs and pensions governance?
IGCs have been breaking new ground. This is not something which is well defined in terms of how to go about measuring value for money. So, to some extent, they’ve been working together to help decide how best to achieve that.
What would a good outcome be from IGCs being in place? It would be interesting to check against that once the dust has settled on the first reports and whether we are on track to have that outcome.
Enhanced trust and confidence in the market is very important. The whole idea of having an independent committee reviewing value for money could in theory increase trust and confidence in the market. So if there were any skeletons in the closet, the idea is that the IGC would find them and therefore that should make sure everyone can trust what providers are saying.
Secondly, hopefully they will act as a catalyst in shifting focus to member outcomes and not just considering price in isolation. In the absence of really good explanations of whether value for money is being provided or not, it is very easy to believe that all pensions are the same.
And if all pensions are the same then the only thing to worry about is price, therefore, price becomes the big focal point, whether that is for regulators, for the government, for industry commentators, for intermediaries, for employers, for members. Whichever audience you can think of certainly price has become in recent years very much in the spotlight and arguably to the exclusion of other factors that affect member outcomes. So a great result from IGCs being in place is they help people to consider all the main things that affect the member outcome and not just price.
As a direct result, IGCs help drive competitors’ behaviours in providers which maximise member outcomes. That is, they create an environment here providers are necessarily focusing on the areas that have the greatest impact on member outcomes.
IGCs also encourage providers to take a forward-looking approach. They cannot be too short term if they have got an independent committee reviewing the value for money they provide on an ongoing basis and considering things like how sustainable their approach is.
What are the latest developments in the master trust market?
The first thing to say is that master trusts need to measure whether good value has been provided so it is very subtly different to what value for money is and the IGCs remit. But, to all intents and purposes, it is the same sort of thing they need to measure to determine that.
They also need to publish whether they believe good value is being provided.
The second thing there has been some discussion about is there is a nervousness from regulators and the government that there are so many new master trusts arriving on the scene there is a risk that they cannot all provide good value. I think the worry from the regulator and the government is that we have got too many, so they are trying to make sure that the bar is set high enough that master trusts can provide good value.
What should employers be looking for when selecting a master trust provider?
The first thing is they have got to decide is whether they are an employer which is looking for the lowest-cost solution because it sees a pension as a cost or an employer that is looking for a solution that will be an asset to their business because they see their pension as a way to support recruitment, retention, reward and retirement of the best people in their industry.
If it is the former, they will be very interested in what is the lowest cost but robust solution they can go for.
If it is the latter, they will be much more interested in things that will affect the member outcomes, such as the quality of engagement with members to help them make the right decision for them, the quality of the investment solutions which helps make sure they get the best level of return for the level of risk they are prepared to take, and the quality of the support around making the right choices when it comes to taking money out of the pension. And underpinning all that, the quality of the experience for both the employer and the member along the road to those outcomes.
Should employers communicate the quality of their pension scheme in order to boost engagement?
It will be important to the organisation and trustees that individuals value the scheme that they are in, especially if they are in the category which sees the scheme as an asset and not just a cost. If they just see it as a cost then they are probably not expecting their members to care much about it and therefore will not spend very much money communicating it.
If they are genuinely setting out to make it an asset to their business, then they will want to make sure people are aware of it and are aware of the fact it is better than alternatives out there in the market. Anything they can do to demonstrate it is a quality solution they are providing is valuable and having an independent committee conclude it is good value can only be beneficial.
What impact will these reports have on the future of pensions?
In time, it will be very interesting to see to what extent those reports help to build increased trust, increased competition and innovation, increased confidence in the market and ultimately increased saving.
Alan Ritchie is head of employer and trustee proposition at Standard Life