Royal London publishes first IGC report but independence questions remain
Royal London has become the first provider to release an independent governance committee report, providing key insights into how committees are defining value for money and dealing with legacy pension schemes.
IGCs were set up to ensure value for money in contract-based schemes. However, they have been dogged by questions about impartiality and a lack of guidance on how to define value for money.
In the first IGC report to be made public, the Royal London committee made the following recommendations:
- The removal of a policy imposing member charges on schemes that are 'paid up', meaning they no longer receive regular contributions.
- Removal of an exit penalty where individuals move their money from the scheme more than three months after leaving their employer and the scheme.
- Amendment of charging structures where customers are continuing to be charged after the cost of a financial adviser’s commission has been recovered.
- Extending loyalty bonus payments until members’ retirement dates, where before they were capped at a specific level.
The first two recommendations will be implemented on April 1 this year, with the second two following in September. They are expected to positively affect around 27,100 customers, or 42 per cent of legacy workplace pensioners.
The changes represent a reduction in charges on the company’s legacy workplace pension contracts of 20 per cent and a cost in excess of £15m in lost income to Royal London.
The issue is that there is no FCA definition of value for money, so they have to make it up as they go along
Shift to customer engagement
Phil Green, chairman of the Royal London IGC, said it was important to publish the reports in advance of the chancellor’s Budget announcement. “In two weeks' time these reports could get buried,” he said.
The recommendations all focus on changing and removing charges, but he said in future the focus would shift to customer engagement.
“The focus is going to be on the customer – we want to... make them better engaged and educated,” he said.
He added that regulation would also be a focus, specifically around transaction costs, saying the industry “really need to have a set of principles so transaction costs can be measured and benchmarked meaningfully”.
Assessing value for money
One of the key questions to be answered by the release of the IGC reports, which must be completed by the end of this tax year in April, is how they deal with the question of value for money. Committees were allowed to define the term for themselves.
Royal London IGC's value-for-money principles
When assessing value for money, the committee takes the following factors into account:
- Ongoing charges must continue to offer value for money.
- Communication with customers must be clear, timely and helpful.
- Contracts should be reviewed regularly to judge their continued relevance to customer’s changing needs.
- Deductions on exit from the face value of a pension must be fair and designed to recoup any unrecovered costs incurred by Royal London as a result of the early exit.
- Assessments of value for money should make allowances for cross-subsidies between different plans.
- Assessments must also consider the impact on Royal London of the costs of establishing new workplace pensions and the need to hold regulatory capital.
Green said the committee had tried to adopt a customer perspective: “We looked at it from the view of a customer. How would they recognise value? Yes cost, but also service [and] quality.”
With more reports due out in the coming weeks, Green said the key consideration was how focused each committee has been on ensuring good value for customers.
“The danger for any IGC is to get dragged down many rabbit holes. The reader [of the report] should be looking to ensure the IGC has remained focused on its objectives,” he said.
But Henry Tapper, director at First Actuarial, said the fact that committees can define value for money for themselves is problematic.
“The issue is that there is no FCA definition of value for money,” he said. “So they have to make it up as they go along.”
Being critical
Tapper said it is also important to examine the committee’s views of the legacy situation and how critical they have been of the provider.
“I’d be interested to know how critical the IGC has been of its insurance company and how rigorous they have been in their work.”
However, Nicola Rondel, counsel at law firm Hogan Lovells, said many providers would likely deal with issues raised by their IGCs quietly, before the reports are released.
“A lot of providers are probably taking steps to address internal issues… so their IGCs can provide a clean bill of health for them. They don’t want their dirty laundry aired in public.”