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Steve Gay speech at Corporate Adviser Summit


Ensuring savers are getting value for money – responding to the OFT challenge to the industry

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Hello and Good Morning

Seven years ago I was sitting on a train which had just arrived at Euston Station. I didn’t realise that it had emptied until a member of staff tapped me on the shoulder. I was too busy reading a speech that Sir Callum McCarthy had just given at the Gleneagles conference, and I found it so enlightening, so challenging, so absorbing that I read it three times. Many of you will remember that speech – it sent shockwaves through the industry and began the Retail Distribution Review fundamentally altering the basis on which our market operates.

The speech pointed out how commercial and ethical norms come together to create new ways of thinking.  – how what was considered normal, reasonable, unchangeable comes to be viewed as flawed, then anachronistic, and eventually just plain wrong. And when we look back at the practices of the past we struggle to understand how we could ever have seen things the way we did.
These periods of cultural shift are coming at us thick and fast – the forces of economics, and technology are driving change at a rate that we have never seen before and demanding that we become much more agile in the way we think about the way our market operates.

And in pensions the force behind the impetus for change is demographics.  You all know the messages and figures of an ageing society – they even teach them in school these days.  Pensions are no longer a conversation killer – now people want to talk.  Why?  Because the reality is sinking in – an ageing society, lower investment returns, economic hardship, and a connected society sharing its concerns - And most of all because there is a paradigm shift occurring called auto-enrolment.

Now we have known for years what an important initiative this is – and it is only right given the scale of change that it would bring with it intense scrutiny of the pensions industry by politicians and media -  and the relentless questioning of the value for money that is being offered to people providing for themselves in later life through an inertia-driven process.

This is natural and we must expect that the questions will keep coming until there are answers that are not only fit for purpose now – but for future generations.

And it was from this perspective that the OFT inquiry into workplace pensions schemes came about.
The ABI worked cooperatively alongside the OFT throughout its enquiry. The OFT reached its conclusions on its own however and on the back of these conclusions, the industry has had to take a good look at itself and see where it can improve.

This has resulted in a series of commitments that ABI members have made to ensure that there is someone impartial attending to the interests of savers and that that all older schemes provide value for money

As we move with times into a world where millions of people are automatically enrolled, we understand why the OFT has had to ask the questions it has asked. 

The pensions industry is where it is by a process of evolution - developing from a retail market based on personal pensions - to a workplace market – and now to a social solution as the state  transferring responsibility for pension provision to employers and to the individual.  So we have Government and regulators seeking to merge social paternalism with commercial product provision across a range of dimensions – governance, charges, transparency, and decumulation - in a way that few anticipated.

And as we see a dramatic change in the shape and size of the pension market through auto-enrolment, and the needs of society continuing to change, I think it is clear that the industry will need to continue to evolve.
An example of this evolution is the recent announcement by the ABI of five principles for a more effective system for pensions tax incentivisation. We need to be thinking differently about how the system as a whole works best for the maximum number of savers.

We need a system which: 

  • Is fairer and easier for people to understand
  • Encourages people to save more – particularly those on low to middle incomes
  • Is straightforward to implement  (for government, industry and employers)
  • Commands cross-party support – for a stable settlement  - and
  • Demonstrates good value for the Exchequer  (it needs to be cost neutral or lower cost)

When people ask me whether the industry is doing a good job – I say ‘much better than we were a few years ago – and not as good as we will a few years from now. That’s the way customer focussed industries develop.’

So what is better than it was?

  • Charges continue to fall (to their lowest ever level)
  • We have agreed with thirteen of our biggest members a standard approach to disclosing charges which will be implemented next year – one number, communicated annually, in pounds
  • we have made major strides forward in helping customers to understand the choices they have at retirement
  • we have launched a facility to help employers calculate and understand the pension charges for their workforce online
  • and we are publishing annuity rates
  • We are looking to a better future rather than hanging onto the status quo

But we must keep thinking about what the future has in store.  Where now? What next?

The OFT’s report should be essential reading for everyone in a leadership position in the pensions industry. It is hard but fair. It is balanced but challenging. Its power is in its measured tone and the detached rationality of its observations.

Above all it answers the question that we have been wrestling with for some time – the Pensions Minister’s exam question for the pensions community:  How can we ensure that millions of people are not auto-enrolled into pension schemes that are not good value for money?

So what does the OFT’s report tell us?

Well it doesn’t tell us the market is completely broken as some have suggested.  But it certainly does tell us that there are some parts that could need fixing - there is plenty we need to do to ensure better outcomes for customers.

The OFT’s report recognises the work that the industry is doing to increase transparency for employees – but also that the demand side is very weak. The OFT makes it clear that we have a market where the employee is often two stages removed from the provider and is not in a position to exercise influence over scheme decisions and value.  That situation isn’t resolved by improved transparency alone – but also by ensuring that there is someone independent to look check that savers continue to get value for money...

You may take the view that this is what the relationship with an EBC or Independent Financial Adviser is for - but even where  the relationship is an enduring one, the client in an advisory relationship is generally the employer with its own particular interests, rather than the employee.

There are of course already other mechanisms in place. Providers of contract schemes will have investment committees. They are bound by COBS to act in the best interests of their client – the employee, and there is a regulatory duty to treat customers fairly. So we are not starting from base camp on this – but the ABI has agreed with its members that Independent Governance Committees will be established by all pension providers by the middle of next year. They will have an independent chair and the majority of members will be independent. The role of the committees will be to assess the value for money of schemes on an on-going basis and to raise any concerns with the pension provider. The Committees will also need to report annually to the Pensions Regulator.

Then there is the question of charges. The OFT recognises the progress that has been progress made on charges.  We know that on average the AMC on new auto-enrolment schemes is about .52% and if we include all the legacy schemes the average is about .77%.  But within that average we know that there are some older schemes (particularly those from the 1990s) which could potentially be used for auto-enrolment, and have AMCs over 1%.

And the OFT’s study was not just limited to auto-enrolment. Even if an old scheme will not be used for that purpose they were still concerned that there is an element of the market which might be offering savers poor value for money.

So ABI members have committed to conducting a thorough audit  which will look at aspects like guarantees in old schemes as well as charges in order to assess value for money to a consistent methodology.

The audit will be conducted under terms of reference established by an Independent Project Board which will be set up shortly.  The  findings will be published by the Project Board and the newly established Independent Governance Committees will oversee remedial action.

This is a very challenging undertaking – not just in its scope and complexity, but because it implies an acceptance that charges and terms that were competitive in a previous time and circumstances will now be revisited based on contemporary standards.  That is a very significant moment in the evolution of our market - but we have come to the conclusion that it must be done if we are to go forward into this new era of auto-enrolment with the trust and confidence of a new generation of pension savers.

So the industry has been able to work constructively with the OFT – and has agreed solutions that require a real change in the way we do things.

But there are also some things that the OFT has recommended that it believes need to be addressed by the Government – things it knows that the industry would find difficult to address itself within the restrictions of competition law. It has called upon the DWP to ban Active Member Discounts and prevent commission bearing schemes to be used for Auto-Enrolment. The DWP will include these matters in their consultation on a charging cap this autumn and no doubt there will be strong arguments advanced on both sides of the debate. We have already seen that the minister was prepared to act on Consultancy Charging, and if the OFT’s recommendations go the same way we may see a further alteration to the shape of the market.

So there are very significant reforms on the way and under consideration for the contract based world. But what about trust-based pensions?  Well we know that there has been a quite heated debate in recent times as to the relative merits of trust and contract schemes. What has the OFT had to say about this?

Well the OFT has not taken the view that one type of pension is inherently better than the other or produces superior results – in fact it has said that it found no evidence that this was so. Much of the focus is on contract based schemes (party because this is where many employers will be making their choice), but the issues with the trust based world have not escaped the OFT’s attention.

The OFT concluded that there are thousands of small trust based schemes with under 1000 employees – many of which are at risk of providing poor value for money

So the OFT has asked the Pensions Regulator to take a variety of actions: 

  • They want the regulator to tell trustees how to assess value for money
  • They want trustees to have to have to give the regulator data on that assessment
  • They want the regulator to use this information to target schemes that are at risk
  • And they want the regulator to see whether poor value schemes can be closed

In short they want there to be consideration of whether there should be greater onus on trustees to prove that their schemes offer value for money.

So – let’s not look at trust based schemes with a less a critical eye than contract - we know that bad things still happen where there are trustees involved (and I have Pensions Liberation Fraud and Incentivised Transfer Exercises in mind particularly)

Now putting aside the differences between pension scheme types – we need to focus on what makes a good pension scheme and have consistent standards:

  • Charges need to offer good value – and they must be transparent
  • Those responsible for pension schemes must be demonstrably competent, fit and proper - they must be sufficiently impartial, and they must be accountable

Times are changing – both for contract and trust based schemes and we need to work in a spirit of co-operation with the regulators, the OFT, and the Government to get to a position where all schemes can be considered not only to be of good quality now – but will remain that way as the years pass.

But the pensions community also needs to see reform as a natural and on-going process by which we constantly seek to improve outcomes for customers. Some commentators will always want to suggest that some radical overhaul can create a pensions paradise but rather than risking the baby with the bathwater what will be more effective is to recognise that though there will be breakthroughs from time to time (as we are seeing in the output from the OFT) the on-going journey will be a consistent aggregation of gains as a result of the reforms we are making:

  • Improving the transparency of charging for employers and savers
  • Helping them to make better choices at retirement
  • Working to develop more flexibility in products to help those in residential care
  • And of course improving governance of the value for money offered by workplace schemes

By taking that approach – by showing to the public that we are willing to continuously evolve and improve our proposition,we will  in time build the trust and confidence that is so important to create a nation of savers. 

Last updated 01/07/2016