14 November 2014 Better workplace pensions: Putting savers interests first

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1 provided by B&CE 14 November 2014 Better workplace pensions: Putting savers interests first About B&CE B&CE is the not-for-profit provider of The People s Pension. It manages assets of 2.2 billion with 2.4 million members. Established in 1942, to provide employee benefits to workers in the construction industry, B&CE now serves employers in any industry. With a tradition of serving low to moderate earners and transient workforces, The People s Pension was launched in 2011 to meet the needs of this group, and announced its millionth member in September B&CE has won a number of awards as the provider of The People s Pension, including DC Provider of Year at the UK Pensions Awards 2014, Best Master Trust Provider at the 2014 Pension and Investment Provider Awards (PIPAs), Auto-Enrolment Provider of the Year at the UK Pensions Awards 2013 and best DC Master Trust at the 2013 PIPAs. We welcome the opportunity to comment on the DWP s consultation paper. Executive Summary With millions of people now being auto-enrolled, we are supportive of the Government s efforts to promote higher standards in DC pensions. The new charge cap is in some ways the centrepiece of this consultation, and we do understand why the Government has decided to cap pension charges. As a low cost provider, where all members pay a simple AMC of 0.5% (equivalent to TER), our charges for The People s Pension already fall substantially below the level at which the Government proposes to place the cap. However, we do have concerns about some of the unintended consequences of the Government s approach. Not least the Government s proposals to accommodate alternative charging structures and the detrimental impact this could have on members. To our minds, we struggle to see how a 0.4% AMC and 2.5% initial charge, permissible under the 0.75% cap, can be in a member s interests. To this end we would like to see the Government make more progress on standardising charges across all pension providers. If pensions could only be charged in one way it would make genuine comparison possible and would make a charge cap easier to implement. 1

2 On the governance requirements, again we support the Government s enthusiasm for promoting higher standards. However, it is important for the Government to remain focused on the end outcome for members and not focus on simple box ticking. Some of the Government s proposals appear unnecessarily prescriptive, and risk placing an administrative burden on providers. Furthermore, the language used in the legislation is highly subjective and risks opening trustees to litigation. Our concern is that the costs of these measures will inevitably be passed to members without improving member outcomes. However, we are also pleased to see a number of permissive proposals in this consultation which allow for a scheme s membership profile to be taken into account. The People s Pension has recently become the first scheme to gain independent assurance under the ICAEW s master trust audit assurance framework. It is not clear how this, TPR s DC Code of Practice, or NAPF s Pension Quality Mark more broadly, complement these reforms. The European Commission is also developing its own standards for occupational pensions through the revised IORP Directive. Yet these existing initiatives have the same objectives; to promote better DC workplace pensions and improve outcomes for scheme members. It appears natural that the Government should bring these programmes together as it develops its compliance regime. In the worst case scenario, providers could find themselves having to demonstrate compliance with all these different regulatory and quasi-regulatory initiatives separately at substantial cost. Consultation questions Q1. (a) Does the definition of relevant scheme (regulation 2) meet the policy intention of protecting members of schemes used for automatic enrolment from high and unfair charges? (b) Does the definition of relevant scheme at (regulation 13) meet the policy intention of ensuring that workplace schemes are well governed in members interests? All of the fund options provided by The People s Pension fall below the proposed charge cap, but nevertheless we agree that the charge cap should apply only to those members who have not made any active investment choices. Q2. Do the draft regulations (regulations 4(3) and 4(4)) meet the policy intention of excluding from the charge cap members of qualifying schemes who have the advantage of a third party promise? With the proposed new freedoms at retirement in this year s Budget, many schemes are reviewing their default investment strategy. They are also considering solutions that might be provided to members to smooth volatility towards retirement. Some of these mechanisms may create a form of promise that could be expensive to provide. We therefore welcome the decision to exclude default funds which benefit from a promise. Q3. Do the regulations achieve the policy intention of protecting against trustees being restricted to particular service providers, while allowing employers to set appropriate parameters around investments? No comment Q4. Do the regulations adequately describe professional trustees? We agree with this definition. 2

3 Q5. Does the definition at regulation 1(2) capture those schemes described as master trust in chapter 2? The regulation captures master trust schemes such as The People s Pension. Q6. Do the draft regulations meet our policy intention of ensuring that occupational schemes are well-governed? We welcome the strengthening of master trust boards to raise governance standards. We agree that the chair and the majority of the board should be independent. Within The People s Pension Trustee limited, the governing body of The People s Pension, all directors must be independent of B&CE. We have argued that increasing the number of directors does not improve governance and so the reduction of the proposed number of trustees from seven to three is a welcome change. However, because of the importance of ensuring the correct individuals are appointed, and the limited time between the final legislation being known and its implementation we would ask for a transitional period of perhaps six months before schemes have to fully comply with this requirement. We agree that it is appropriate for the trustees of master trusts to be able to serve as an independent member of that firm s IGC. This is particularly the case within B&CE where the membership characteristics and operation of The People s Pension and its stakeholder sibling, EasyBuild, are very similar. The ability to have a common group of individuals governing both arrangements will help to contain costs that would otherwise be passed on to member. We believe that allowing members to serve on both master trust boards and IGCs will make the most of what could be a limited pool of suitable members for governance committees and allow a useful level of oversight and cross-pollination between schemes. It is essential that each master trust board should be able to decide on the best way to seek the views of its members. The 1.2million members of The People s Pension are a diverse group and a prescriptive ruling on contact would not suit a great many of them. For example, we are not convinced that a members panel would be the best way to garner members views or to be a practical or cost-effective measure. It would be hard for any panel to be truly representative of our large membership, or for any election to be effectively managed, particularly at a time when membership continues to grow rapidly. Instead we consider that it is more appropriate to provide a variety of channels for sufficiently engaged members to make their views known, and to feel that they are listened to. We have been proactive in ensuring that members concerns are considered by the Trustee, for example, where there are member complaints. This process driven representation is better suited to The People s Pension than one or more member-nominated trustees. We support the proposal that the Chairman s Statement should be publically available. However, we do not consider it necessary for it to be issued automatically to members and participating employers as it would introduce further unnecessary costs and is unlikely to foster engagement or to be of interest to the majority of members. We have recently become, at considerable expense, the first master trust to comply with the ICAEW s audit assurance framework, which was developed in line with TPR s DC Code of Practice. We have also documented our compliance with TPR s 31 Quality features, and have also achieved certification under the NAPF s Pension Quality Mark Ready standard. It is unclear how the Government s proposals complement or replace all of these existing standards. Just as the Trustee s fiduciary duty to members is consistent from year to year, so the manner in which it is evidenced should also be consistent from year to year. Ultimately, we would ask for further consideration that TPR directly regulate large master trusts rather than delegating this responsibility to third parties which further increases scheme costs. 3

4 Q7. Do you have any comments regarding the policy on who should have the duty of compliance with the charges measures? Do you have any comments about how the draft regulation (regulation 4) meets the policy intention? It will be nearly impossible for the majority of employers to calculate whether the scheme they are using falls within the charge cap. One of the key features of a master trust is that a third party fulfils all of the duties of running the scheme. In a scheme such as The People s Pension where the same terms are offered to all employers, and an effective governance structure already exists, it would be nonsense for compliance with the charge cap not to be the responsibility of the Trustee. Our main concern is in the content of the Chairman s Statement. The primary concern of the statement is described as an assessment of good value. At no point is this defined, nor has it ever been adequately defined in research, or the key features proposed. This is in contrast to the fiduciary duty borne by trustees which is well defined by centuries of case law and practice. Good value appears to be an ill-conceived attempt to redefine fiduciary duty in a soundbite. This lack of definition presents a real risk to trustees who may find themselves open to legal challenge by individuals who feel that good value has not been provided in their case. Such challenges would succeed or fail based solely on the subjective view taken by a judge. We recommend that references to value for money and good value are removed from legislation and instead placed into guidance issued by The Pension Regulator. Furthermore, the degree of disclosure required in the Chairman s Statement presents us with some concern. There is a suggestion that line by line disclosure of expenses may ultimately be required. This could require schemes and providers to disclose commercially sensitive information such as the terms obtained from their asset managers. Ultimately, this could conflict with competition law which prohibits such disclosure as damaging to the market. Q8. Do you have any comments on the policy regarding the member borne deductions that fall within the cap, and how the draft regulations reflect the policy intention? These exclusions are: (a) The non-recurring variable transaction costs which are incurred by a scheme when buying, selling, lending and borrowing underlying investments ( transaction costs definition in regulation 2) (b) pension sharing and compliance with court orders ( charges definition in regulation 2) (c) winding up costs ( winding up costs definition in regulation 2) The proposals do not appear to present any difficulties to us. Q9. Do you agree with the policy on which the draft regulations are based (see regulation 3) to capture as many workers as possible who made no active or informed choice about their investment strategy, whilst also minimising the risk of capping funds where members made an active choice? We agree with the policy of capping charges for those who make use of the default fund, either by passive or active decision, and of allowing other funds to carry a higher charge. Q10. Do you agree that the draft regulations (regulation 3(3)) should allow members who have made a recent active choice to remain in an arrangement which is not subject to the charge cap? No members of The People s Pension are affected by the charge cap and we have no comment. Q11. Do you have any comments on the policy about protecting the members to whom the cap applies? Do you have any comments about how the draft regulations meet the policy intention? No comment. 4

5 Q12. Do you have any comments on the policy intention of: (a) imposing the cap on the total fund of the member and not just on contributions made after the relevant date? (b) prohibiting charge structures other than those set out in paragraph 68 (and reflected in regulation 5)? (c) limiting the opportunities for altering charging structures as described above, whilst avoiding locking schemes into particular charging structures indefinitely? (Regulation 5(4)) Although our members are unaffected, imposing the cap on the total fund will be simpler to implement and does not require the establishment of identical funds with different charging structures. As we have previously highlighted, we have significant concerns with the Government s approach to dealing with schemes that have alternative charging structures, believing that the proposals could lead to unintended consequences, by, for example, permitting providers to side-step the policy objectives in some cases. The basis for equivalence in the DWP charging tables is highly subjective and is unlikely to reflect the experience of any individual member. The equivalence tables have clearly been designed to accommodate two specific providers and do not represent the single charge structures employed by the majority of contract or trust based schemes created in this century. Indeed the presence of the combination charging tables perpetuates and legitimises the insufficient visibility and (lack of) comparability of charges highlighted by the OFT. The combination charging tables permit individuals to suffer charges significantly higher than the cap where membership in the scheme is for a short period. This is particularly likely to affect the low paid and transient workers which the two main schemes utilising such combination charges typically serve. By contrast, The People s Pension serves the same market and does so with a single Annual Management Charge of 0.5%. We strongly believe that schemes operating a combination charge should not be permitted to represent this as being equivalent to any particular single annual charge. We would have preferred the DWP to pursue this policy the other way round; by standardising charges in a single form before capping them. This would have enabled comparison between providers and would ultimately have made the charge cap easier to apply and less contentious. However, we appreciate the Government s reasons for capping charges without full standardisation, and would support efforts to fully standardise charges in the future. Q13. Do you have any comments on the policy described above in relation to the valuation of the member s fund and the period over which the charge cap applies? And do you have any comments on how the draft regulations reflect that policy (regulation 7)? The proposed measures preventing a scheme flipping charging structures may burden members with additional fees. Some charging changes are triggered by a particular event. Such triggers might include achieving a certain fund value, or to act as a protection against high charges where a member ceases contributing membership. The effect of the current drafting may be that a member suffers higher charges for a longer period than might otherwise be necessary. Q14. Do you have any comments on the policy regarding opt-in services described above? Do you have any comments on the draft regulation which reflects that policy? We support the ability for schemes to charge for services which members elect to use themselves. With a liberalisation of the retirement income market taking place in 2015 it is important that schemes are able to cover their costs if members are looking to them to provide access to the new freedoms. 5

6 Q15. Do you have any comments on the policy in relation to Active Member Discounts? Do you have any comments on the draft regulation (regulation 10) which reflects this policy? We believe that it should be possible for employers to pay charges on behalf of their staff and welcome the decision to allow this to continue. Q16. In addition to the questions already asked, is there anything else in the policies as set out in this paper on which you have any comments? Do you have any comments on how the draft regulations reflect the policies explained in this paper? No comment. Q17. Is the scheme return the most proportionate way to obtain information on compliance with the governance standards and charge measures? We agree with this proposal. Q18. Is the proposed compliance approach to the Chair s Statement, as described in draft regulations 24 and 26 appropriate and proportionate? We agree with the proposals. Q19. Do the adjustment regulations (regulation 9(2)(a)) reflect our policy intent of providing an adjustment mechanism for occupational schemes which cannot stay compliant with the charge cap, to take action to resolve the situation promptly? No comment. Q20. Do the adjustment regulations (regulation 9(2)(b)) meet the policy intention of providing an adjustment mechanism for occupational schemes, when as a result of an unexpected event; they are unlikely to be able to comply with the cap? The People s Pension has a closed-loop funding basis, being dependent upon support from B&CE until its Assets Under Management are able to generate a self-sustaining level of income. Our concern here is not with unexpected costs but is instead with the rising costs of demonstrating compliance with an ever expanding legislative and regulatory rulebook. Any increased cost can only be supported by total assets over twenty times greater. The People s Pension has been established on the principle that the costs borne by members should reflect the costs of running the scheme. We have therefore committed to reducing scheme costs when doing so is sustainable. Any increased costs prolong the period over which B&CE must subsidise the scheme, delaying the point at which it can become truly self-sufficient and at which it is possible to reduce costs on member accounts. Contact details For further information on this response, or the work of B&CE and The People s Pension, please contact: Nick Gannon Policy Manager E nickgannon@bandce.co.uk T M B & C E Financial Services Limited Manor Royal, Crawley, West Sussex, RH10 9QP. Registered in England No To help us improve our service, we may record your call. B&CE Financial Services Limited is Authorised and regulated by the Financial Conduct Authority. Ref: The Company is a distributor of, and an administrator for, The People s Pension and the Employee Life Cover Scheme which are occupational pension schemes to which different law and regulation applies. Further details, can be found on our website WINNER 6