Does the IGC blueprint matter for a greener value?
For this summer, not-so-locked-down diary instalment, JB draws inspiration from satirist, writer and now climate campaigner Richard Curtis: first, to understand what is the purpose of pensions, generally, but more precisely is there a link between pension sustainability and member value. Second, in drawing on one of Curtis’ created anti-heroes Blackadder, JB suggests independent board directors presiding over workplace pensions will need a ‘cunning plan’. In doing so pension-land may well provide fund boards with a climate-related future for the Assessment of Value process and reports.
Greetings once more from the non-executive nexus. One where I try to mix my own pluralistic adventures as honestly as possible, but more often trip into my own philosophical pith. Why do I exist, what is my purpose? Accordingly, having heavily vested myself in the politically-charged topic of diversity for my last Diary entry, this month I put my pensions hat on to turn my attention to the fate of workplace pensions, established Value for Money (VfM) governance and sustainability. In doing so try to gauge whether the relatively immature Assessment of Value (AoV) regime for mutual funds might converge with climate change?
We have seen upwards of 50 AoV reports at the time of writing, and media coverage, that fund boards may be rightly feeling a little overwhelmed. However, it has at least answered the cynics; that the AoV is becoming more than a compliance tick box exercise, even if we collectively remain ever so slightly confused as to whom we are reporting to.
Whilst some media commentary has been largely superficial, one article, by Bob Currie at trade publication Funds Europe, has attempted to drill deeper into the very gums of the AoV process. His analysis included several worthwhile contributions, including my co-author of the seminal ‘Maginot Line’ AoV paper, Sunil Chadda. Having put myself on the line, from the start of the AoV, it was time to take those brave pills and put on the big
boy (person) pants, and Bob’s article can be found here: Regulation: The Correct Value Judgements
I expect that the first couple of years of AoV reporting will prove largely cathartic, driving better dialogue, fund and share class mergers, some closures, and the odd fee changes. It will deal with what have been deemed dysfunctions, but without necessarily addressing the greater purpose of asset management and its inextricable link to pension funding. At some stage this initial catharsis will slow and new tougher questions will begin to emerge.
Questions like what purpose do pensions serve? What is a sustainable income? That word, sustainability, has become a regulatory hot poker of late. It is why I believe all value assessment will eventually converge on a much broader definition of value. The Irish and Luxembourg regulators, the Central Bank of Ireland and the Commission de Surveillence du Secteur Financier respectively, are also following a similar trajectory. Where then are we heading? Can fund boards look to the pension industry and the journey of Independent Governance Committees (IGCs) as a forerunner, a blueprint for where the AoV might head?
In the last decade the Financial Conduct Authority (FCA) conducted two large thematic reviews of the pension (unit-linked) industry. It led to the formation of IGCs, the new bastions in workplace pensions to bring oversight, drive value and improve member outcomes. Latterly IGCs picked up a direct role in driving Environmental Social Governance (ESG) considerations in workplace pensions. Henry Tapper of AgeWage has diligently reviewed and opined on the effectiveness of these IGC reports over the years, critiquing their clarity and transparency. More here: The FCA promote a secondary market in workplace pensions
Now the FCA is following-up with an IGC review to gauge if IGCs are actually making a difference, adding value and moreover, succeeding in improving the purpose and sustainability of investor pensions.
Questions around IGC escalation, provider benchmarking and comparability have emerged. If the rigour of the IGC and VfM process is likely to both deepen and broaden, in response, then I surmise this trend will continue beyond simply cost and performance. This requires IGC chairs to connect some dots. For instance, if we can agree that value creation (providing sustainable income to members) is broadly the sum of Regulation + Governance + Transparency + Sustainability + Engagement, then those dots might include some of the following:
- An increasing sense of big society and purpose for pensions
- Greater clarity of provider duty of care
- Sharper focus on transparency, data and reporting
- Linking sustainability to systemic stability
- Fintech to cut through member remoteness and apathy, for instance
- Advice process becoming better conjoined with sustainability
- Sharpening of fund classifications and taxonomy
What seems clear is that the key parts of the workplace pension value chain are being rapidly aligned (at least in principle) to a more sustainable model. Accordingly, it seems clear IGCs will have to independently review the value and performance of their workplace provider. This will necessitate a far less curated appraisal than has existed to date. When then considering ‘comparability’ on VfM it is not such a jump to assume this will ultimately include comparing the sustainability of the workplace pension provider.
In closing, how well does the pension industry makes this transition? Could sustainability be used to greenwash value reporting? Perhaps but regulators will likely see this as the lesser of evils. Likewise, we should reasonably expect a closer alignment of AoV and VfM, as the Financial Conduct Authority pursues convergence and sustainability.
Until we go over the top, next time.
“Am I jumping the gun, Baldrick, or are the words ‘I have a cunning plan‘ marching with ill-deserved confidence in the direction of this conversation?“
– ‘Blackadder Goes Forth’ by Richard Curtis, Ben Elton, Rowan Atkinson.
In his monthly column, Diary of an iNED, JB records his experiences on the boards of two very different organisations as he navigates the highs and lows of a plural career at a time when the fund industry is beset with challenges and opportunities in equal measure.
JB can be contacted at firstname.lastname@example.org.