15 May 2014 Private Pensions Policy and Analysis Department for Work and Pensions 1 st Floor, Caxton House 6-12 Tothill Street London SW1H 9NA Submitted via email: reinvigorating.pensions@dwp.gsi.gov.uk RE: Better workplace pensions: further measures for savers Dear Sirs, BlackRock is pleased to have the opportunity to respond to the matters for further consultation within the Better workplace pensions; further measures for savers paper published in March 2014. BlackRock is a premier provider of asset management, risk management and advisory services to institutional, intermediary and individual clients worldwide. BlackRock also has extensive expertise in the fixed income markets and significant client holdings in securitised assets and serves as collateral manager to certain securitised products. BlackRock is one of the world s leading asset management firms, managing approximately 2.64 trillion as at 31 March 2014 on behalf of institutional and individual clients worldwide, across equity, fixed income, cash management, alternative investment and multi-investment and advisory strategies including the ishares exchange traded funds. Our client base includes public and private sector pension plans, insurance companies, third-party distributors and mutual funds, endowments, foundations, charities, corporations, official institutions and banks as well as individuals around the world. BlackRock represents the interests of its clients by acting in every case as their agent. It is from this perspective that we engage on all matters of public policy. BlackRock supports policy changes and regulatory reform globally where it increases transparency, protects investors, facilitates responsible growth of capital markets and, based on thorough cost-benefit analysis, preserves consumer choice. BlackRock is a member of the European Fund and Asset Management Association (EFAMA) and a number of national and sectoral industry associations 1 reflecting our European client base and activities. We support efforts to deliver enhancements to the workplace pension landscape. The proposals should generate further competition in the market and thereby deliver further benefits to individual scheme members. In supporting these efforts, there are however some key points which need to be considered before the regime can be finalised: 1. The accreditation process has the potential to add value by incentivising administrators to meet quality standards and achieve this accreditation. However, in order that the process is effective, the standards must be consistently applied, embraced by industry 1 Amongst others are: Alternative Investment Management Association (AIMA); Association of British Insurers (ABI); Association of Luxembourg Fund Industry (ALFI); Assogestioni; Bundesverband Investment und Asset Management (BVI); CityUK; Dutch Fund and Asset Management Association (DUFAS); Institutional Money Market Fund Association (IMMFA); Investment Management Association (IMA); International Securities Lending Association (ISLA); and National Association of Pension Funds (NAPF). 1
and subject to continual monitoring in order that the accreditation constitutes a viable differentiator between administrators. 2. The proposals will generate additional costs, impacting therefore the individual scheme members. It is important that a thorough cost-benefit analysis is performed before the requirements are finalised as this will enable a determination of the detail or flexibility which is imposed upon schemes and administrators through the new rules. 3. The proposals are due to come in to effect in April 2015, which provides less than a year until the obligations are live despite the absence of fully finalised requirements. Consequently, we would welcome a suitable transitional period within which administrators and schemes can work towards compliance with these new requirements. The new quality obligations should not be rushed in order to deliver appropriate quality; in some respects this will take time as the required standards are developed and resources sourced and obtained. Without a transitional period there is a risk that the required quality of service will not be initially available. This would not be consistent with the overall objectives of the proposals. 4. We welcome the further consultation and provider workshops as proposed at the FCA s industry workshop on Independent Governance Committees held on 30 April. We acknowledge that there are some broader challenges that need to be worked through as summarised at that meeting. Amongst these we note the issues over the potential limitations of Contract Law on the way in which independent governance committees can operate and the challenge in consistently describing value for money standards at an industry level. We respond in more detail below to the consultation questions that are of relevance to us and our end-investors reflecting where we believe we can add value to the consultation. We welcome the opportunity to address, and comment on, the issues raised by the consultation paper and the broader issues associated with implementation of the amendments to the workplace pensions landscape, and we would be happy to work with DWP on any specific issue(s) that may assist in improving the implementation of the proposals. Yours faithfully Paul Bucksey Managing Director, BlackRock Head of UK Defined Contribution 2
Responses to questions 1. We would welcome views on the potential benefits of accreditation of administrators, and what role government and regulators could play in supporting this. The accreditation of administrators can potentially provide some benefits through raising standards within the industry. However, in order for this to occur, the accreditation must be meaningful and supported by market participants with thorough standards that are recognised and adopted by the industry. There is also a need to ensure an effective mode of assessment is in operation if the accreditation is to remain meaningful over time. The delivery of a robust accreditation process will enable employers to distinguish the difference between administrators that have or do not have that accreditation. If this process is not sufficiently robust, the ability of trustees to differentiate between two administrators will be limited and driven largely by costs. The central role of regulators in any accreditation scheme will be to ensure that a standard approach is adopted. This will generate consistency and thereby allow employers to see value in the receipt of any accreditation. However, any accreditation process will incur costs, both initially and on an ongoing basis. These costs will need to be taken into consideration as the process is finalised in order that the outcome delivers benefits which significantly outweigh the costs. 2. We would also welcome suggestions of other approaches to helping trustees and Independent Governance Committees (IGCs) ensure that their scheme is being administered to a good standard. The trustees and IGCs should be responsible for establishing the standards which they expect the scheme to adhere to. These should be based on minimum standards to which the industry must adhere, but allow trustees and IGCs to raise standards further in pursuit of the appropriate outcome for their individual members. In order that this may operate efficiently, there is a need for some form of benchmarking exercise to be performed. This could be through the periodic publication of examples of good practice which have been observed by the regulatory authorities. The publication through this means would provide the added value of independence when compared against any information which the scheme could provide internally to the trustees and IGCs, and would be in keeping with the objectives of establishing the IGCs. The information which could be used to provide an indication of the quality of administration could include: complaints; error rates; administration charges; staff retention rates; and qualifications of key individuals, as well as other measures trustees may find of use. 3. Should mastertrusts have to meet the same independence standards as providers of contract-based schemes? The two models are not the same, and should not therefore be subject to the same levels of independence. It would be of greater benefit to the individual members to ensure that the overall levels of governance to which these two scheme types were exposed are equivalent. This would allow the different models to exist but provide choice over the adoption of individual requirements to reflect the nature, scale and complexity of the individual scheme. 4. We would welcome views on the proposed definition of independent at Annex B. The concept of independence is something which is already in existence through other governance arrangements; an example of such being the UK Corporate Governance Code. It is not clear why the proposed definition of independence within the paper is more onerous than 3
that which is already an accepted term within use elsewhere. We consider therefore that any definition should be consistent with that which is already in use elsewhere. This would ensure there was consistency of approaches throughout corporate governance arrangements and deliver a solution which had synergies with existing governance. Such synergies would engender an approach which could be more easily considered alongside, and compared with, those governance arrangements which already exist within UK corporations. The proposed definition could also create practical challenges in implementation. The requirement for the IGC to have at least seven members, the majority of which are independent, will create challenges for schemes when seeking to identify and recruit these individuals, especially given the ban on recruitment of IGC members who have an existing material relationship with the company within the last three years. The pool of suitable and available candidates is likely to be limited, at least initially. We support the emerging view across many providers that a membership of no more than five would provide a workable option. We also request that implementation provides for: (a) a transitional period after implementation of at least a further year during which recruitment can be performed; and (b) for situations thereafter where the membership of the IGC falls below the minimum required (for whatever reason) there is a grace period within which the recruitment process for the new member(s) may be performed. Given the size and scope of BlackRock s activities, we anticipate that the ban on recruitment of members who have a material business relationship with the firm during the past three years could limit the availability of candidates for our IGCs. Consequently, we would welcome guidance on the definition of what constitutes a material business relationship and would suggest that this definition should permit members to be recruited where no material conflicts exists between the parties, but allowing a business relationship to exist. This is an area of potential ambiguity that should be clarified. We also note that members views should be directly represented, suggesting that candidates from consumer groups and technical groups / industry bodies should be considered for inclusion in the IGC. We would welcome guidance here in order to ensure that any potential conflict with existing business relationships are avoided. 5. Should the independence requirements be applied in different ways to different models of mastertrust? In particular, how should the independence requirements be applied to mastertrusts that use an independent trustee firm to act as their corporate trustee? The relationships under a mastertrust can be complex and therefore there is a need to ensure careful consideration of any proposal before its introduction. It may be appropriate here to define at a high level the concept of independence for all trust-based schemes but allow the individual scheme to determine how exactly this should be applied having regard to any specificities associated with the scheme. 10. We would welcome views on how these transparency requirements could be made to work effectively in unbundled trust-based arrangements (including mastertrusts). By increasing the transparency obligations that are placed on unbundled trust-based arrangements, the compliance costs associated with that transparency would increase. This would be a result of the additional level of data collation which the administrator would need to perform in order to report on the transaction costs per individual member. The benefit which would be generated through the additional transparency must be considered against the increase in costs per member which would be associated with this transparency and therefore we request that a thorough cost-benefit analysis is performed before further progression of this matter. 4
11. We would welcome views on whether the transparency requirements we propose for DC schemes should, in the future, be extended to DB schemes, to enable sponsoring employers to further scrutinise the costs of such schemes. In general, there is a less direct correlation between individual cost components and the outcome for pensioners in a DB scheme when compared to a DC scheme. With the former, the outcome for pensioners is more affected by factors such as the cost of providing guarantees and the investment return. This has the consequence that the imposition of similar transparency requirements on DB and DC schemes may not provide the employer with comparable information. For this reason, and whilst we support harmonisation to the extent that it provides benefit, we do not believe that the transparency requirements for DC schemes should be applied verbatim to DB schemes unless this is justifiable based on a thorough costbenefit analysis. 5