When the Pensions and Lifetime Savings Association (PLSA) launched the Pension Quality Mark (PQM) in 2009, it was with the goal of setting an aspirational standard for the market which identified those defined contribution (DC) schemes that went well beyond the regulatory minimum.
As we look into 2017, it is an appropriate time to reflect on the successes of PQM over the last eight years.
Today the PQM has over 230 holders covering over 680,000 savers. The accreditation is the recognised quality mark for the highest quality DC schemes that provide some of the highest contribution levels (a minimum 10% for PQM and a minimum 15% for PQM PLUS) in the UK market. As well as contribution levels, holding the PQM accreditation means the scheme gives top quality communications to members and beneficiaries and ensures outcomes for members are at the forefront through industry leading governance standards.
In addition, the market has adopted the PQM Ready, which, since 2013, has been the recognised quality mark that employers have turned to in selecting a master trust to provide a pension to their employees. With 12 Master Trusts currently holding the PQM Ready, covering in excess of seven million savers, PQM Ready is having a significant impact in improving standards across the industry.
During 2016 we launched the Retirement Quality Mark (RQM), in response to the new range of products that providers are bringing to market since pensions freedoms were announced in 2014. The RQM builds on the communications and governance standards of the PQM to ensure that these new products, in this nascent market are developed and managed in the best interests of the consumer. Currently, there are three holders of the RQM, Legal & General – Worksave Pension Plan, National Pension Trust and LifeSight, with five applications currently in the pipeline.
So what does 2017 and beyond hold for independently assessed quality marks in the pensions market?
While 2016 was busy, 2017 looks to be just as busy. We will be undertaking the first major review of the PQM standards since 2013. The review will take into account the impact of the Pensions Bill, the 2017 review and the TPRs 21st century trustee work. This will ensure that holders of the PQM accreditations continue to represent those who are at the forefront of providing high quality DC pensions by going above and beyond the regulatory minimum.
In drafting the consultation, I anticipate the Board will be looking to once again challenge the industry in setting what good quality looks like in pension provision.
Personally there are three areas that I’m looking to give particular attention to in the consultation process: contribution levels, training and competency of trustees and stewardship.
No degree in economics is required to understand that the current average level of contributions or the target automatic enrolment rate for contributions of 8% is not going to provide a comfortable retirement for millions of people.
To understand the impact of different contribution levels in achieving a better retirement income, the PLSA recently undertook a piece of research and thought leadership which resulted in the, ‘Retirement Income Adequacy: Generation by Generation’ report. The report analysed the incomes different UK generations can expect in retirement.
Of the 25.5 million people in employment in the UK, 1.6 million are still at risk of falling short of the Joseph Rowntree Foundation’s Minimum Income Standard (£9,500 in 2016) and 13.6 million are at risk of not meeting the target replacement rate set out by the Pension Commission at 67% replacement of earnings for the average earner.
The report suggests that at some point automatic enrolment contributions will have to increase to at least 12%.
Given this, and the desire for PQM to identify the highest quality pension schemes that offer more than the minimum standard, we want to consult on where the PQM standard for contribution levels should be set. What does ‘good’ now look like given the PLSA report?
Training and competency of trustees
As an industry we expect a lot from our professional and lay trustees, the expected introduction of fit and proper person test is a positive step forward, but we can still go further in reviewing the competency of trustees.
This potential new requirement of the standards would need to be supported with more robust personalised training and development programmes. What we regularly see in our current assessment of schemes and providers is a tick box approach taken to the training and development of trustees. We will need to address this in the standards to look at how we can have more robust assessments and evidence requirements demonstrating that a scheme or provider meets the standards.
All this needs to be balanced to ensure that lay members who make a valuable contribution to the governance of schemes are not excluded or discouraged from putting themselves forward to serve.
The time has long since passed where stewardship can be ignored in the governance of Pension schemes.
The evidence continues to mount, and many including myself would argue that it is irrefutable that the incorporation of environmental, social and governance (ESG) considerations into investment strategies is not just a means of generating a warm feeling of righteousness, but a critical way to achieve better returns.
But how does this reflect in pension scheme investment decision making? To what extent should the values of the schemes investments reflect the view of the members and beneficiaries?
Surveys continue to show that while securing a healthy return on investment is a priority for pension savers, factors such as the pay and conditions of the workforce at investee companies and the impact of investments on the environment are also important. A study by IPSOS Mori cited in the PLSA’s Viewpoint magazine found that 42 per cent of respondents said they would be prepared to accept lower returns from pension plans with higher ethical investment standards.
For these reasons, it is important to ask in the consultation whether ‘best in class’ pensions should have a way of reflecting the views of their members and have a clear and robust policy for managing investments in an engaged, responsible, sustainable manner.
These are just three of the topics that the consultation is likely to cover.
So 2017 is going to be just as busy as 2016. I’m extremely lucky to be supported by a Board with deep knowledge and experience of our industry and a real passion to improve the outcomes for consumers. However, all of us on the Board and in the executive team, recognise that the way to ensure the best outcome for the rewriting of the PQM standards is to crowdsource. So please sign up here to receive a notification when we release the PQM consultation paper in the first half of 2017. Thank you in advance for your time to respond to the consultation and for your continued support in 2017.