Office of Fair Trading report falls short on pensions governance
There is much to welcome in the results of the Office of Fair Trading’s market study into workplace pensions. They suggest (I would not class them as recommendations given they have simply identified problems and asked DWP to consult on them) more action on high charges in ‘legacy’ schemes, built-in adviser commissions that would be illegal to set up today, and the practice of charging members that have left pension schemes more than those that remain.
I was particularly pleased that they identified the possibility of a single-number disclosure on transaction costs – the difficulty here will be how transaction costs are defined.
There is, however, one area where they have made a firmer recommendation – and unfortunately it is the one area where they have got it badly wrong. The notion of independent governance committees embedded within insurance companies is fanciful, in my opinion, and will lead to merely cosmetic improvements in how contract-based workplace pension schemes (which do not have trustees) are governed.
Here is the recommendation in full:
To address the OFT’s concerns about lack of independent scrutiny of contract based schemes, the ABI has agreed that their members will establish independent governance committees. Committees should recommend changes to providers and escalate issues to regulators where they see risks of poor outcomes for savers. We recommend that the key elements of this governance solution should be embedded by the Government in a minimum governance standard that will apply to all pension schemes.
Sounds brilliant, but it’s an illusion – not to mention the fact that DWP has already proposed this idea. ‘Independence’ means nothing without clarity on who appoints the governance committees. It will almost certainly be left to the providers themselves. Furthermore, only a majority of committee members need be independent; the rest can be employees of the provider.
Even if some kind of independent process for appointing independent governance committees could be agreed (I might be satisfied if the Pensions Regulator were involved, but absurdly the Pensions Regulator does not actually regulate the most common form of defined contribution workplace pensions), it begs the question of where the actual individuals would be found. We will almost certainly see the development of a new business model whereby companies that are formally independent of any provider are employed with running these committees. The ABI has in fact suggested that, for small providers, the whole governance process could be outsourced to ‘an independent governing person or firm in place of the Independent Governance Committee’; see footnote 233 of the OFT report.
Such firms might be independent in a legal sense but they will nevertheless be dependent on the pensions industry to make a living. This is a recipe for wool being pulled over pensions savers eye.
Strangely, I can find no reference in the report (certainly not in the recommendations section) to whether any members of the governance committee would have to be representative of the actual scheme members, or even the employers responsible for the schemes. This is a mind-boggling oversight by the OFT.
Even if committees could be established that were genuinely independent and representative of the schemes’ stakeholders, including employees, we have to remember that insurance companies do not provide a single scheme to lots of different employers, akin to a multi-employer trust-based scheme. Rather, they provide lots of different schemes to lots of different employers, each theoretically with different terms suited to the needs of different companies. So how, then, can a single governance committee adjudicate? What if some schemes are providing value for money while others are not? What if the same terms are appropriate for one set of employees but not others in a different scheme? Will employers want to share confidential information about their company with other companies that happen to have the same provider (they may well have chosen a contract-based scheme precisely to avoid this)?
The best answer to all of these questions is trust-based governance – although trust-based defined contribution schemes are far from perfect and the OFT should have had more to say on this. A partial answer would be the establishment of scheme-specific governance within contract-based schemes. It is such a shame that after months of hard work the OFT hasn’t been able to advance this cause at all.