Work and Pensions CommitteeWritten evidence submitted by Scottish Life and the Royal London Group

About Scottish Life and Royal London

Scottish Life

Scottish Life was founded in 1881 in Edinburgh as a proprietary company, becoming a mutual company in 1968.

On 1 July 2001, Scottish Life demutualised and transferred its business to The Royal London Mutual Insurance Society Limited. Scottish Life is a division of Royal London and is the specialist pensions business within the Group, providing individual and group pensions to the market via intermediaries.

Scottish Life and Royal London’s other intermediary businesses are based mainly in Edinburgh where 1,060 staff are employed, with 780 working in other parts of the UK and overseas (as at 31 December 2011).

Royal London Group

Royal London Group is a specialist financial service provider. Its businesses focus on those sectors of the market which value quality propositions, operating through a number of brands:

Scottish Life—UK pensions market.

Bright Grey—UK protection market.

Scottish Provident—UK protection market.

Royal London 360°—offshore investment markets.

RLAM—fund management.

Royal London Plus—life and pensions administration.

Fundsdirect/Ascentric—fund supermarket; Wrap platform.

Caledonian Life—Ireland based; protection products.

MoneyVista—online service helps individuals create their own financial plan.

Royal London is the largest mutual life and pensions company in the UK with Group funds under management of total funds under management of £46.2 billion.

Group businesses serve around four million customers and employ 2,940 people. Figures quoted are as at 30 December 2011.

Summary

1. We welcome efforts to bring greater transparency of charges and costs and will support further work by the ABI (Association of Bristish Insurers) in this area. It should be noted however that good member outcomes are a product of a number of elements of which costs is just one.

2. Good member outcomes are derived from high coverage, how much people save, investment returns and good decision making at retirement. A proposition which encourages and assists in these areas is likely to produce better outcomes than a very cheap one which does not.

3. We believe there should be quick and direct action to ensure fairness between existing and deferred members. The government should act to remove the use of Deferred Member Charges from the market rather than rely on the small pots initiative to resolve this issue.

4. The issue of small pots does need to be addressed but aggregators are not the answer. A single aggregator, particularly where this was NEST (National Employment Savings Trust) and there was not a very low cap on values transferred, would cause significant market distortion and would remove competition from the market.

5. Customer interests can better be served by allowing small pension pots to “follow the member” up to a certain level and for the industry to build a hub for pension data. Here all pension data is “virtually aggregated” and larger pots can be brought together physically once the member or their advisers have considered all the pertinent information.

6. We fully support the work the TPR (The Pensions Regulator) has done through the Investment Government Group and their work on the “six principles”. We want to ensure, however, that well run and well governed DC (Defined Contribution)arrangements are not seen as poor relations to trust based schemes. The governance and oversight provided by Scottish Life’s Investment Advisory group for example ensures good governance by industry experts.

7. Many members will not make an investment decision and therefore the design, governance and performance of the default fund is critical.

8. Investment tools can help ensure individual consumers can be invested in appropriate funds or strategies. The importance of advice, however, should not be forgotten. Skilled advisers are able to take account of the full range of information and circumstances thus ensuring, not only best fit for investment, but how much needs to be invested or indeed whether investing in a pension is the best advice.

9. The Government and industry need to be mindful of the importance of advice. There cannot be a presumption that employers and all members can get the best automatic enrolment solution on their own without help and support. Professional advisers need to play an important part in ensuring the success of the Government’s reforms. There may be a regulatory gap here though as at present advisers do not need to be regulated to provide advice to corporate clients.

10. Automatic enrolment will naturally increase scale across the pensions market. Commercial provider’s will of course only supply schemes where they believe this will be commercially viable and that they can provide value for money schemes which meet the needs of their customers.

11. It has been suggested that greater economies of scale can only be achieved by their being fewer schemes and providers in the market. This however will not necessarily result in better value for money for members as less competition can lead to a narrower range of solutions, less innovation and poor service.

12. Competition, including that coming from NEST, is the best way to ensure providers are efficient, innovative and provide value for money solutions which are the right fit for the needs not only of members but employers too. We must not forget that there is a great deal of additional work and responsibility being placed on employers and providers, often together with their advisers, must find ways to make fulfilling their employer duties as easy as possible.

Our Response to the Issues Raised by the Committee

Transparency of charges and costs

13. Good member outcomes are a product of a number of elements of which costs is just one.

14. Good member outcomes are derived from:

(a)High coverage—for example, by helping employers provide good schemes which have a low opt out rate.

(b)How much people save—this is a critical factor as investment returns and low charges cannot recover inappropriately low investment input.

(c)Investment returns—the financial outcome from the best performing funds and the worst can be dramatic.

(d)Decision making at retirement—again the income obtained by selecting the best annuity than the worst can be hugely different.

15. A proposition which encourages and assists in these areas is likely to produce better outcomes than a very cheap one which does not.

16. We welcome efforts to bring greater transparency of charges and costs and will support further work by the ABI in this area.

17. In particular we believe there should be quick and direct action to ensure fairness between existing and deferred members.

18. We believe that the issue of Deferred Member Charges (DMCs) should be addressed directly and a clear statement made by the government and/or the regulator that this practice is no longer acceptable on the grounds of treating customers fairly. It does not cost any more to administer a paid up plan than an active plan so why should the customer pay more?

19. We do not believe that the small pots initiative will deal sufficiently with the problem of DMCs as we believe that there will need to be a cap on physical aggregation and therefore those determined to use DMCs will simply build the new dynamic into their calculations when setting DMC charging.

Clarity of communication to pension scheme members

20. We welcome the work which has been done by the DWP, NEST and the ABI to simplify language and make the terms used more consumer friendly.

21. The pensions industry has worked hard over recent years to improve communications to customers. We have however been hampered in this end by the requirements of regulation. Communications have tended to err on the side of compliance rather than being able to get important messages across in a way that engages customers. It is important that all the responsible agencies (FSA conduct business unit, DWP, TPR) work together to ensure that regulation and legal framework act together in a way which does not push product providers toward supplying long and wordy documents which are likely to turn consumers off and be inefficient. Documents which don’t add value and end up in the bin only add cost within the system.

22. Improving public understanding of investment, risk and return is essential in ensuring good member outcomes. The answer cannot be to produce continually lower risk defaults, especially where there is a significant period to expected retirement, as this can have a significant detrimental effect of the funds available to provide an income.

How DC scheme members can be supported to make investment decisions and assess risks, including when converting to annuities

23. Scottish Life, like many pensions providers, are developing a wide range of tools to help members make appropriate investment decisions and assess the risks.

24. Attitude to and capacity for risk is important in this regard as it can ensure that customers get the investment that best fits them and their individual circumstances.

25. Tools can help here but the importance of advice should not be forgotten. Skilled advisers are able to take account of the full range of information and circumstances thus ensuring, not only best fit for investment, but how much needs to be invested or indeed whether investing in a pension is the best advice.

26. The Government and industry need to be mindful of the importance of quality advice. There cannot be a presumption that employers and all members can get the best automatic enrolment solution on their own without help and support. Professional advisers need to play an important part in ensuring the success of these essential reforms.

27. It should be noted however that many members will not make an investment decision and therefore the design, governance and performance of the default fund is critical.

28. We fully support the work the TPR have done through the Investment Governance Group and their work on the six principles for good workplace DC. We want to ensure, however, that well run and well governed DC arrangements are not seen as poor relations to trust based schemes. The governance and oversight provided by Scottish Life’s Investment Advisory group for example ensures good governance by industry and independent experts. Our approach to governance has helped Scottish Life to be voted Ultimate Default Fund at the Corporate Adviser Awards three years running. This award is voted for by corporate advisers and our success can be seen as evidence of a trend in adviser thinking as to the importance of governance, suitability for risk profile and de-risking as the investor approaches retirement, all of which is provided by our governed range.

29. Regarding how members can be supported when converting to annuities, we believe proper promotion of the open market option is an essential first step. We must ensure customers have access to information which enables them to make informed decisions about annuities that are appropriate to their needs. Making customers aware of the potential for enhanced annuities to increase retirement income is also extremely important. As members of the ABI we are bound by their compulsory code of conduct in this area which comes into effect from 1 March 2013.

Whether greater economies of scale within the sector could produce better value for money for members and if so, how this can be achieved

30. Automatic enrolment will naturally increase scale across the pensions market.

31. Commercial provider’s will of course only supply schemes where they believe this will be commercially viable and that they can provide value for money schemes which meet the needs of their customers.

32. It has been suggested that greater economies of scale can only be achieved by their being fewer schemes and providers in the market. This however will not necessarily result in better value for money for members as less competition can lead to a narrower range of solutions, less innovation and poor service.

33. Competition, including that coming from NEST, is the best way to ensure providers are efficient, innovative and provide value for money solutions which are the right fit for the needs not only of members but employers too. We must not forget that there is a great deal of additional work and responsibility being placed on employers and providers, often together with their advisers, must find ways to make fulfilling their employer duties as easy as possible.

34. Given that many employers would be unable to find a commercial provider to satisfy their employer duties, NEST has a vital role to play in filling this supply side gap. It is important however that NEST remains focussed on filling this gap rather than being seen simply as a scale competitor to the commercial market given the substantial public subsidy the corporation has received. It is therefore not appropriate for example to see NEST as an aggregator for pots as this would likely remove competition from the market and create demand for further subsidy where there is no market failure.

35. Better value for money can be provided through the scale of product provider’s overall book of business, not just through the very large super trusts. For example individual pensions are well placed as appropriate consolidation vehicles which are specifically tailored to the needs of the individual. In this model an individual would have their company scheme and their individual plan. When they leave employment, funds are transferred to their individual plan which will should grow into a bigger and bigger pot with each transfer and hopefully, though good communications and the provision of planning tools and services, additional contributions.

36. Individual tailored solutions can provide very good value for money. For example, our annual management charge for our Pensions Portfolio Personal Pension is 0.5% where the fund is in excess of £27,200.

How to strike an appropriate balance between regulation, self-regulation and good governance which restores confidence and raises standards

37. It is essential that requirements and principles created in one agency do not conflict or overlap inappropriately with that of another.

38. A good example of this is in the area of investment governance. The DWP, FSA and TPR all have laid down principles, guidance or requirements as follows:

(a)TPR six principles for good workplace DC.

(b)TPR Investment Governance Group—principles for investment governance of work-based DC pension schemes.

(c)FSA six treating customers fairly outcomes.

(d)DWP guidance for offering default option for DC Automatic Enrolment schemes.

39. While we fully support the principles and the aims of this work, having so much coming from different places can lead to confusion and therefore cost. We would like to see a simplification and bringing together of the guidance and regulation of workplace pension arrangements.

40. Regulation will need to focus where there is the greatest risk. We want to ensure that the regulators understand that contract based arrangements can offer governance and oversight which is as good as, and in some cases better than, that offered by trust based arrangements.

41. Large product providers offering contract based DC schemes have the resources, people and experience to provide excellent governance. Product provider offerings are developing rapidly in the area of governance and Scottish Life are pleased to be seen as spearheading this development with the launch of our Governed Range in January 2009

42. The DWP, TPR and FSA must work together to ensure regulation and legal framework do not create the need for long compliance documentation that does not add value to the customer. It is also essential that requirements and principles created in one agency does not conflict or overlap inappropriately with that of another

43. There is a potential gap in regulation in the area of advice to corporate clients. At present there is no requirement for advisers to be regulated where they are giving advice to corporate clients. This is the case even where this advice extends to the design, selection and monitoring of the default fund used for the scheme. Given the importance of ensuring that corporate clients and the eventual policyholders are treated fairly and that they receive the best possible advice and service, there is a case for regulation of advisers providing advice in this space.

11 April 2012

Prepared 11th February 2013