Developing a Retirement Quality Mark

Background

The Board of the Pension Quality Mark (PQM) launched a consultation in November 2015 on its proposed new Mark, the Retirement Quality Mark (RQM).

The existing PQM is focused on the accumulation phase of retirement saving, with schemes able to gain accreditation for the processes and features of their pension up to the point an individual takes their benefits. By contrast, the RQM is intended to assess the in-retirement products provided by schemes and providers against the quality of their governance and communications.

General comments

We agree with the general premise that the availability of an RQM could help scheme members and customers make informed decisions; support trustees to help their members make informed decisions, through signposting accredited options; and help the development of the market for in-retirement products by setting out what “good” looks like.

However, we have some comments about the proposed operation of the RQM, which we set out below.

Establishing the standards

It is important to recognise the environment in which the RQM is being established. Whilst we agree that having standards is likely to be helpful for the reasons set out above, we believe that a smaller core set of key principles would be advantageous for a number of reasons.

As the in-retirement market for the new world of pension freedoms is in its infancy, there is significant scope for product development. As such (and as the consultation acknowledges), it is right that the RQM will develop over time to ensure that new products and retirement solutions can continue to meet the standards set.

A smaller set of key principles at the outset would therefore allow early products to be delivered to a high standard, offering the protections sought – ie fair treatment of savers and value for money – whilst encouraging innovation in the market.

A straightforward set of core standards is also likely to have greater commercial appeal for providers, as well as the potential to be attained in relation to a larger variety of products.

A way of managing the development of the standards, whilst also managing the expectations of those who can be expected to apply for accreditation, might be to make clear that the standards will be developed in distinct stages. If a core set of key principles is used at the outset, it could be made clear that these will be reviewed at appropriate intervals (depending on the speed of development of the market) and adapted accordingly.

As the consultation notes, one intended purpose of the RQM is that it should operate as a tool to help scheme members and customers make informed decisions. It also notes that the RQM is not intended to provide guarantees. This aspect will need to be made very clear to members and customers. Given that the outcomes for savers will depend very much on factors such as the individual’s available funds and the decisions they make as to how to use those funds, care should be taken to ensure that the RQM is not interpreted as a guarantee of the longevity of an individual’s available funds or any other outcome.

Similarly, it should be made clear that the RQM is not designed for use by trustees as an endorsement of a particular product. As individuals’ financial needs vary significantly, they should continue to be encouraged to seek advice in connection with their options.

Scope

Section 3 of the consultation deals with the proposed scope of the RQM, listing those products which are intended to be covered.

In our view, drawing the list narrowly (to exclude annuities and single uncrystallised pension fund lump sums (UFPLS), is too restrictive. The new pension freedoms have inevitably generated significant interest in cash options in particular. However, annuities may continue to be a good option for many members / customers, whilst an UFPLS can be a good option for those with very small pots. Excluding certain products from the scope of the RQM may give the impression that they are not as appropriate as retirement products which have the RQM.

Accreditation: The role of IGCs

We agree with the comment in the consultation (at paragraph 4.6) that responsibility for the quality of the product, including ensuring that it operates in the best interests of consumers, is less clear cut in non-trust based arrangements than in trust-based schemes, where the onus will fall on the trustees.

The consultation proposes that, where a provider with an Independent Governance Committee (IGC) offers an in-retirement product, responsibility for oversight should fall to the IGC which is already charged with acting in the interest of the policyholders. As the consultation acknowledges, this would be an extension of IGC responsibilities at an early stage of their existence, going beyond the current statutory remit. It could also prove burdensome on some IGCs and pose a challenge to their resources (although for others that may be less of a concern).

Such an extension of IGC responsibilities gives rise to the potential for conflicts of interest to arise. Whilst the RQM standards are being designed with a view to ensuring high quality governance and communications, and ultimately better outcomes for individual savers, it will ultimately be up to providers themselves to decide whether to apply for the RQM and do what is needed to meet the required tests. The IGC will be in a position to assess the products on offer against the RQM standards and provide evidence of those standards being met. However, it does not have the control over the products that would be needed to achieve an RQM. There is also the potential for the IGC to assess the product in one way for RQM qualification and in another for “value for money” purposes, unless a consistent approach is adopted.

In practice, it may be difficult to assess products which attract many thousands of customers, against those customers’ individual needs. It should also be borne in mind that the scope for changing agreed terms may be more difficult in the context of a retirement product which is set up under contract than it is to change arrangements under a trust-based scheme, as can be achieved in order to obtain a PQM.

A joint approach is likely to be needed, between IGC and the provider, to achieve and maintain the RQM standards in respect of a particular product. The extent of the IGC’s responsibility should therefore be carefully delineated with this in mind.

If part or all of the responsibility is to fall on IGCs, we agree that where there is no IGC, an “IGC-like body” may be needed to fulfil this function.

Demonstrating value for money

The consultation puts value for money at the heart of good governance and we agree that this is an important aspect. However, measuring value for money is very subjective and, as such, it is an area which could see differing views between the IGC and the provider.

This can be further complicated by the fact that many thousands of individuals may opt for the same product. Assessing the extent to which a particular product is value for money will be difficult to demonstrate in respect of all customers who purchase the product.

The PQM and PQM Plus work well because, in addition to a requirement for good governance and communications, the key test to be met is objective, ie contributions paid by the employer. We therefore suggest that some form of objective measure would be helpful for the RQM. For example, this could be based on rates of charges.

Evidencing good governance and communications

It is proposed that minutes of trustee / IGC meetings are submitted as part of a package of evidence to demonstrate that the RQM standards have been met.

It will be important to make sure that such a requirement does not rest on a “box ticking” approach to governance. For example, it should be made clear that including a review of governance and communications for RQM purposes as a standard agenda item should not mean that reviews end up as a note in the minutes rather than the in-depth analysis that is envisaged.

Care also needs to be taken with the disclosure of minutes and any other documents which may contain sensitive personal data and/or commercially sensitive data. Such information would need to be redacted to ensure that those submitting them do not breach their data protection responsibilities. An alternative would be to ask for relevant extracts which evidence a review of governance and/or communications, rather than an entire set of minutes.