Independent Governance Committee’s Report on workplace pensions provided by Prudential Assurance Company

March 2016

Independent Governance Committee’s Report on workplace pensions provided by Prudential Assurance Company

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Contents

Glossary of terms 4

Report of IGC activities and findings 61 IGC Role 62 Governance 63 Volumes 64DefinitionofValueforMoney 65 Investments 76 Charges 87 Service Standards 138 Communications 149 Plansfor2017 15

AppendixIGCMemberbiographies 16

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Prudential IGC report for members: March 2017

REPORT of the CHAIR of the INDEPENDENT GOVERNANCE COMMITTEE (IGC) for PRUDENTIAL

DearMember

As you may be aware the IGC has been established by the Financial Conduct Authority to ensure that you receive ValueforMoneyfromyourpensionscheme.

In this, my second annual report, I am pleased to report that the actions we agreed with Prudential last year are largelycompleted,andthosethathavenotyetbeenfullycompletedwillbeveryshortly.

Thereturnsonyoursavingshave,ingeneral,beengoodover2016anddonotcausetheIGCconcern.ForexamplethereturnonthePrudential’sDynamicGrowthIV,amajordefaultfund,hasbeenparticularlystrongduring2016.

However,somedefaultfundsthatwereconstructedanumberofyearsagohavenotyetbeenchangedtoensurethattheyarecloselyalignedwiththeoptionsyounowhaveunderPensionsFreedoms(introducedbyformerChancellorGeorgeOsborne).WearepressingPrudentialandyourEmployertobringthesefundsintoline.

I am pleased to say that a wide-ranging programme to reduce the charges you are paying is nearing completion, andtheIGCissatisfiedthatthechargesremainingrepresentvalueformoney.Iamalsopleasedtoreportthat theadministrationofyourpensionplanisuptoscratch,andthatanychangesyoumakeareprocessedquickly andaccurately.

OnefurtherareawhereIGCfeelsthereisroomforimprovementisinthecommunicationsyoureceive.TheIGCarepressinghardforthesetobeimproved,toallowyoutoengagewithyourpensionplanbetter,soyoucansaveenoughfortheretirementyouwant.WewillbeworkingwithPrudentialandmajoremployersonthis.

Ifyouhavetheappetite,pleasedoreadmyfullreport(ofaroundadozenpages).Itcanbefoundat www.pru.co.uk/employers/autoenrolment/pru-igc.Inadditionifyouwouldliketocontactmewithanyquestions,commentsorsuggestionspleasecontactthePrudentialGovernanceManagementTeamatGMT@prudential.co.uk whowillpassyourmessageontome.

Best wishes

LawrenceChurchillCBE Chairman, Independent Governance Committee

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AMCAnnual Management Charge: the charge made over the year by fund managers and product providers to cover the expenses associated with running the investment fund and administering the pension plan.

AVCAdditional Voluntary Contributions: these are a particular type of pension savings which have a trustee in place or governance over them already and the IGC won’t be looking at these.

COBS Code of Business Sourcebook (in other words, the FCA’s rule book).

CPIThe Consumer Prices Index: CPI is the official measure of inflation of consumer prices of the United Kingdom.

Equivalent Annual Management Charge

The agreed methodology for assessing charges applied to policies investing into more than one fund. It aims to determine one overall AMC for a policy by using a weighted average.

FCA The Financial Conduct Authority.

Glossary of terms

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Glide pathThis refers to the time, leading up to the expected date for taking retirement benefits, during which automatic investment switching applies.

GuaranteesAn investment guarantee is a special provision that is designed to protect investors from incurring overall losses.

IGC Independent Governance Committee.

IPBThe Independent Project Board was set up by the OFT to oversee the audit of workplace pensions.

NEST National Employment Savings Trust.

OFT Office of Fair Trading (from 1 April 2015, part of the Competition and Markets Authority).

Pensions Freedoms

In April 2015 tax rules were changed to allow individuals in defined contribution pensions (also known as money purchase pensions) to choose whether they use their pension to provide a lump sum, a series of lump sums, a guaranteed income for life or to place their money in a drawdown plan.

Prudential“Prudential” is a trading name of The Prudential Assurance Company Limited, the provider of the workplace pensions.

SmoothingThe use of accounting techniques to level out fluctuations in investment returns from one period to the next (aiming to ‘smooth’ the peaks and troughs of market movements).

Trust-based SchemesA trust-based pension scheme is a scheme that is managed by a board of trustees. The trustees have overall responsibility for the management, administration and investment of the plan.

VfM Value for Money, see section 4 for more information.

Watch ListFunds are added to this watch list if they are under performing or if there are other causes for concern (e.g. a change in fund manager). These funds are then monitored closely and reviewed on a regular basis.

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1. IGC RoleThe IGC’s overriding objective is to independently review theValueforMoneyofcontract-baseddefinedcontribution(“DC”)workplacepensionschemes.

2. GovernanceThe IGC is properly constituted with three independent membersandtwomembersfromPrudential,whosebiographiesindicatingtheirqualificationsfortherolecan beseenintheAppendix.

The IGC has met as a Committee on nine occasions during 2016,andindividualmembershavemetwithPrudentialstaff,otherIGCchairsandPrudential’sregulators(FCA)outsideofformalmeetings.

TheIGCissupportedbyadedicatedteamofPrudentialstaffresponsiblefortheoversightandgovernanceofPrudential’sDCworkplaceschemes.PrudentialUK’sCompany Secretariat team has also supported the organisation,governanceandminutingofIGCmeetings.

WhereIGChasidentifiedissuesofconcernithasraisedthesewithPrudential’sseniormanagement.Prudential’smanagementhasformallyconfirmedtheaccuracyandrelevanceofinformationpresentedtotheIGConwhichtheIGChasreliedtomakeitsassessments.WehaveencouragedattendanceofPrudential’sstaffataseniorlevelandhavebeenparticularlyappreciativeofattendancebytheChairmanofPrudentialUK,thenewUKInsuranceChiefExecutive,thenewCustomerAdvocateandmembersofPrudential’sRisk,ActuarialandInvestmentfunctionstoassisttheIGCinfulfillingitsduties.

3. VolumesPrudential’sstrategyforworkplacepensionsistopreserveandenhancevalueinitsexistingbusiness,alongsidetheselectiveacquisitionofnewbusiness.Aspeopleretire,volumeswillreduceoffsetbynewmembersjoiningtheirEmployer’spensionarrangements.Thenumberofmemberswithin the IGC remit reduced by 2% during the year to 150,000membersholding165,000policies.Thevalueofthepensionpotsroseby9%to£3.7bn.

It is worth noting that Prudential’s practice is to pass on cost reductions not just to the members within IGC’s remitbutalsotoafur ther87,000membersoftheirTrust-basedschemes.

4. Definition of Value for MoneyTheIGC’sapproachtoVfMtakesaccountofarangeoffactors,includingcharges,performance,serviceandcommunications.However,thesehavebeenweightedtoreflectourviewthatwhatultimatelymattersistheoutcomeformembers.Onthebasisthatgoodfinancialoutcomes that lead to higher retirement income are the most important, we prioritise investment returns andchargesasbeingthemostimportantelementsofVfM.Wethenlookatanumberofsecondaryservicequalityfeatures,placingparticularemphasisontheswiftandaccurateprocessingofcontributions,thelevelofperformanceindealingwithcomplaints,andthequality ofcommunications.Weanticipatemoreworkonthequalityofcommunicationsintheyearsahead.

WithregardtotheprimaryfinancialcomponentsofVfM, it is important to note that

a)forinvestmentreturns,wehavegivenprioritytoactualoutcomesaswellaslookingatforecastreturnsforanappropriateriskexposureinthedesignofdefaultinvestmentstrategies.Pragmatically,wehaveusedareferencepointforfundperformanceofCPI+3%pa(aftercharges)overasustainedperiod.Iffundperformancehasbeendeliveredatthislevelorabove,webelievethatVfMconcernsdonotariseinrelationtoinvestmentreturnsorcharges.

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During2016,wereceivedsupportforourreferencepointofCPI+3%netofallchargesfromProfessorsLynda Grattan and Andrew Scott in their book “The 100YearLife”(p31)asthemostappropriatelong-termmeasure.WealsounderstandthatNEST,thelargestmaster trust with over 4m members, also uses CPI+3% asitsreferencepoint.

Wekeepaneyeonthetraditionalindustrymeasureofrelativeperformance,butdonotregarditasthebestmeasurefordeterminingVfM,sinceunderthismeasurementthevalueofamember’sfundcouldreduceandstillrepresenttopquartileperformance!

b)Forcharges,wehavecontinuedtousethreereferencepointstoidentifywhereValueforMoneyconcernsmight arise

–0.75%paforchargesinschemesusedforauto-enrolment(ortheequivalentlimitssetbyDWPforschemes with combination charges)

– 1.00%paforunit-linkedschemesnotusedforauto-enrolment (thus maintaining consistency with the IPB referencepoint)

– 1.25%paforwith-profitsinvestments,wherethebenefitsofsmoothingandguaranteesbringextravaluetoMembers.In2015,wereceivedactuarialadvicetotheeffectthattheextravalueoftheseproductfeaturesoverunit-linkedinvestmentsisworthatleast0.25%pa.During2017,wewillreviewwith-profitsinmoredetailtotestwhether1.25%remainsanappropriatebenchmark.

5. Investments

5.1 Investment Strategies and Performance

AsthisisthemostimportantfeatureofVfM,Iwillbeginwithareportonwhatwehavedoneinthisarea.

The headline is that investment performance has been strong during 2016.WehavereconfirmedthatthelargestschemescontinuetooutperformourreferencepointofCPI+3%,whichfor2016equatesto4.6%.Investmentperformanceis also monitored against the CPI+3% annualised over both thelastthreeandfiveyears.

We have not come across any default investment strategy which has fallen below our reference point. Two individual fundsusedwithindefaultinvestmentstrategieswereidentifiedashavingonlyjustpassedtheirVfMreferencepoint,andwewillpayparticularattentiontothesefundsaspartofourmonitoringprocessin2017.

The larger schemes all have suitable investment strategies intermsofassetmix,but relatively few have yet updated their glide pathstotakeaccountofPensionsFreedoms.Mostarestilltargetingtax-freecashandannuitisationasthemethodofdrawingapension.WewillpressPrudentialtodoallitcantodrawattentiontotheimportanceofconsideringwhatglidepathismostappropriateasadefaultformembers.

For smaller schemes, we have discovered some investment strategies, which, in our view, do not have sufficient diversification of asset classes and nearly all do not yet have suitableglidepaths.WestartedaprogrammeofwritingtotheEmployerswheretheremightbeanissueinAugust2016.WhereEmployersdonotofferacrediblealternative,Prudential (where it has the power) will automatically moveallmembersinthecurrentdefaultstrategyintoonewhichbetterreflectsthenewflexibilitiesandchoicethatmembersarenowabletoexercisewhendrawinganincomeinretirement.Sofarwehavewrittentoaround200Employersoutofatotalof2,400(8%).Thesizeandcomplexityofthisworkhasmeantthatthepaceofprogresshasbeenslowandclearlythisisapotentialconcern as we approach the two-year mark since Pension Freedomswereannounced.

5.2 Investment Governance of the “Watch List”

PrudentialreviewsthesizeandperformanceofindividualfundsandcomparesagainstbothindustrysectorbenchmarksandtheIGCVfMreferencepoint.Individualfundssometimesunderperformorgivecauseforconcern.WehaveseensomeevidencethatPrudentialhasimprovedtheprocessesforoverseeingthewatchlistduring2016andforclosingdownunderperformingfunds.However,the IGC is not yet persuaded that the new processes are sufficientlyrobustorquicklyimplementedtodelivergoodmemberoutcomes.Wewillmonitorthiscloselyduring2017andpushPrudentialtodomore.

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5.3 Costs of switching Investment Strategies

Movingfromoneinvestmentstrategytoanotherinvolvestradingcostsforindividualassets.IGCwasaskedbyonelargeEmployertomonitortheefficiencyoftheswitchprocesstominimisetheimpactonpensionpotvalues.Weoversawtheswitchandfoundthattheprocesswasefficientand that the costs were in line with the anticipated costs communicatedtotheEmployer.

5.4 Comparative Efficiency of investment strategy Design

Manyinvestmentstrategiesaresuitable,withdifferentcombinationsofinvestmentrisk/returnaspirations,andofcoursecharges,includingtransactioncosts.IGCisinterestedinexploringwhetherthereisausefulwayofidentifyingthecomparativeefficiencyofonedesignoveranother.Wehaveheldpreliminarydiscussionswithanumberofexpertswhichwillcontinueinto2017.

Wereceivedacomprehensivereportfromanexternalconsultancyanalysingtherisk/rewardprofileofthePrudential’sDynamicGrowthfunds.Somesmallimprovementswereidentified,which,whenimplemented,holdouttheprospectofbroadlythe samereturnforlessrisk.

5.5 Transaction Costs

WewelcometheFCA’sconsultationpaper(CP16/30)publishedinOctober2016inwhichitproposesaconsistentcross-industrymethodologyformeasuringtransactioncosts.

WellbeforetheFCApaper,weheldaworkshopin May2016withourmajorfundmanagers(M&G,Blackrockand Prudential) to determine a suitable, pragmatic approach.Wedecidedthatwewouldmeasuretransactioncostsastheproductofturnovermultipliedbythebid/offerspread.WemeasuredthetransactioncostsforthePrudential’sowndefaultfundandforabouttwentyofthemostusedfunds,includingthestrategiesusedbyourmajoremployers.Thefundsanalysedrepresented84%ofthefundsunderIGC’sremit.

Headlinesfromtheresultsare;

a) 68% of assets under management had transaction costs of less than 0.1%, and 92% had charges of less than 0.2%.

b) Prudential’s own default fund had transaction costs of seven hundredths of a percent (0.07%) – which compareswellwiththefigurespublishedbyNESTinlast year’s accounts, where the modal transaction costs were0.083%.

c) Individualfundswithhighertransactioncosts(upto0.75%)hadparticularcharacteristics(tradingstrategiestoexploitvaluecaptureinlessliquidanddeepmarkets).

d)TheUKPropertyFundhadtransactioncostsandpropertyexpensestotalling1.02%.Thelevelofthesecharges,whilehigherthanforothertypesoffunds,isowingtothenatureofthepropertymarket.The PropertyFundrepresented1%ofthevalueoffundsanalysed,and,importantly;itsperformancenetofallchargeshasbeen5.4%paonanannualisedfive-yearbasis.

WenotethattheFCAmethodologycouldresultindifferentfigures,butattheendof2016,wecansaythat we have discovered that transaction costs do not represent a source of significant leakage of value, and we welcome effortstopublicisefiguresduring2017.ItisprematureatthisstagetoreconcilethefiguresfoundbyourstudyandtheFCA’spublishedestimateofanaverageof0.5%(intheirAssetManagementMarketStudy).Wewilltrytounderstandthisbetterduring2017.

6. ChargesMyreportfor2015setoutaseriesofactionsdesignedto reduce charges across Prudential’s workplace pension schemes.Iampleasedtoreportthatthesereductions have been applied and that members are now receiving thebenefitoflowerchargeswhichovertimewillincreasethesizeoftheirpensionpots.

Inmoredetail;

6.1 Eliminating the impact of Initial charges

Initialchargeswereanoldfeatureofcontractstructure (forworkplacepensionspre2001)andwereexpressedinanumberofconfusingwaysincluding“capital”unitswhichcarriedhighercharges,reductionsinthepercentageofcontributionsinvestedandexitchargeswhenapensionplanwascashedin.Inadditionextrachargesweremadebecauseofcommissionspaidtoadvisers.

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I am delighted to say that Prudential has removed all such charges right across its workplace pensions. In particular, it has gone further than the FCA cap on exit charges of 1%, and eliminated these completely. The reductions were implemented in tranches across the three Prudential platformsbetween22ndMarchand19thJune2016.

6.2 Small Pots

A particular problem occurred with small pots (less than £10,000)ifamonthlyadministrationchargewaslevied.The impact was that small pots could become smaller and smaller,potentiallybeingextinguishedcompletelybecauseofthechargingstructure.

Attheendof2015,weagreedwithPrudentialtocapsuchfeesat£24perannum(aroundthecostPrudentialpaystotheiroutsourcers).

Prudentialthenwrotetothec5,000membersaffectedpointingouttheiroptionsoftransferor,iftheywereoverage55,cash-in.Theletteranddiscussionswerewelcomed– many did not realise that charges could erode their pot sizeiftheywerenolongermakingcontributions.Wehadresponsesfromover2,000customers(a40%responserate)butonly400ofthesefollowedupwithanyaction.

WeconsultedwithPrudentialastowhatcouldbedonewith the residual policies, as they were still not getting value formoney.Prudentialvolunteeredtocancelthistypeofcharging structure completely across its workplace pensions (forbothtrustandcontract-basedpensions).ThischangeiscurrentlyscheduledtobecompletedbyJuly2017.

As a result, those members with small pots will now be receiving improved Value for Money and will not pay charges higher than our reference points.

6.3 Higher Charging Funds

Wereportedlastyearthatsomemembershadselectedfundswhichchargedoverourunit-linkedreferencepointof1%pa.

WewrotetoallmembersinhigherchargingfundswiththeexceptionofthoseinvestingintoProperty.Intotal724 policyholders (and 135 advisers) were sent a letter between 12th September and 26th October, pointing out thatitmaybepossibleforthemtoinvestinasimilarfundatalowercost.BytheendofNovember,elevencustomershad contacted Prudential to either switch their investments orclaimthevalueoftheirplan.

Ofthe32fundsinwhichthesememberswereinvested,threeareonthewatchlist.Chargesvarybyscheme–thehighestAMCis1.85%andiscurrentlyapplicabletothreecustomerswhohaveselectedaspecificinvestment.UsingthemostcommonAMC,twofundsfailedtomeetourperformancereferencepointofCPI+3%overthreeyears.

Membersinhigher-chargingfundsmaybeatriskofnotreceivingvalueformoney.In2017,IGCwillconsiderwhatstepsitshouldinvitePrudentialtotakenext.

6.4 Personal pension holders who were previously members of workplace schemes

TheIPBAuditaskedIGCstolookatasampleofpersonalpensions, where customers had previously been members ofworkplacepensions.Thiswascarriedoutandwherethelinkremainedrelativelyeasytoreporton,allofthese members were picked up within the proposed IPB implementationplanwhichIpublishedlastyear.MemberseasilyidentifiedwereontwooutofthethreeITplatforms.

Prudentialhasinformedusthatallmembersonthe3rdplatformhavenowbeenidentifiedandthatallchargesforexplicitcommission,exitchargesandpolicyfees(wheretheyexist)willberemovedbyJuly2017.

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6.5 Impact of reduced charges on the size of pension pots

Wewereinterestedtofindoutwhatimpactthereductionsinchargeswouldhaveonindividualmembers.Prudentialidentifiednineillustrativeexamples(I’llcallthempersonas)whicharerepresentativeoftheIGCmemberpopulationasawhole.

Thesepersonashavebeenusedtoillustratehowprojectedvaluesforourmembersmightlookbothbeforeandafterthechargereductions.Factorssuchasyearstoretirement,amountofcontributionspaidandpotsizehavebeenconsideredandincludedwithinthemodellingtoproducethesenine‘typical’situations.Someexamplesaregivenbelow:

• Wantstoretire:Atage65

• Pension:GroupPersonalPension

• Currentpensionpotvalue:£24,000

• Continuingtopayannualcontributionsof£2,500

• Priya’s pension fund value after 15 years, cashed in at age 65:

• Pre-reductionincharges:£88,300

• Post-reductionincharges:£96,200

• Increaseinfundvalueof£7,900 (or 8.9%)

Priya has been saving each month into her workplace pension which she aims to use to provide her with anincomeinretirement.Duetothereductioninongoingcharges,Priyawillnowhave£7,900moretoputtowardsherfuturewhenshecashesherpensioninat65.

Priya, 50

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• Wantstoretire:Atage65

• Pension:GroupPersonalPension

• Currentunit-linkedpensionpotvalue:£12,000

• Johnhasstoppedpayinghismonthlycontributions.

• John’s pension fund value after 15 years, cashed in at 65:

• Pre-reductionincharges:£19,700

• Post-reductionincharges:£22,100

• Increaseinfundvalueof£2,400 (or 12.2%)

Johnhasstoppedpayinghismonthlycontributionsbutplansnottotouchhisworkplacepensionsavingsuntilage65.Hewantstousethelumpsumhereceivestopayoffhismortgageatthattime.ThereductioninchargesmeansthatJohn’soverallsavingpotcouldpotentiallybe£2,400morethanitwouldhavebeenpreviously,leavingJohnwithenoughmoneytoredecoratehishomeaswell.

John, 50

• Wantstoretire:Atage65

• Pension:GroupPersonalPension

• Currentpensionpotvalue:£24,000

• Brianhascontinuedtomakeannualpaymentsof£2,500tohisworkplace pensionbutlaterfindsthatheneedstoaccesshismoneyearlierthanhe hadanticipatedatage58(knownasearlyexit).

• Brian’s pension fund value after eight years cashed in early at age 58:

• Pre-reductionincharges:£54,300

• Post-reductionincharges:£57,000

• Increaseinfundvalueof£2,700 (or 5.0%)

Brianhasdecidedtocashinhisplanearlyunderthenewpensionsfreedoms.Inadditiontothereductioninongoingcharges,theearlyexitchargeswhichwouldhavereducedhissavingsbeforearenownolongerapplicable.ThismeansthatBrianhasmoreflexibilitytoaccesshismoneyinawaythatisbettersuitedtohisindividualcircumstances.

Brian, 50

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• Wantstoretire:Atage65

• Pension:GroupPersonalPension

• Currentpensionpotvalue:£6,500

• Angelastoppedpayinghermonthlycontributionsandlefthersavings togrow.Fiveyearslateratage60,Angeladecidesthatshewouldlike totransferhermoneyelsewherewhenshechangesjobs.

• Angela’spensionvalue–accessedearlyatage60,thetotalpotential valueofAngela’sworkplacepensionpot:

• Pre-reductionincharges:£7,100

• Post-reductionincharges:£7,910

• Increaseinfundvalueof£810 (or 11.40%)

Angelamaynowhavealargerfundtotransfergivinghernewpensionanearlyboost.

Angela, 55

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6.6 Impact of reductions on the Annual Management Charge

Anotherwayofillustratingtheimpactofthechargereductionsistocompareforeachpersona,theequivalentannualmanagementchargesbeforeandafterthereductions.

Persona Equivalent AMC

Commission type Further variablesPre Reduction

in ChargesPost Reduction

in Charges

1

Reflected in AMC

HighAverage pot size

Making ongoing paymentsAge 50

1.53% 0.78%

2 Mid 1.28% 0.78%

3 Low 1.03% 0.78%

4 HighSmaller pension pot

No longer making paymentsAge 50

1.53% 0.78%

5 Mid 1.28% 0.78%

6 Low 1.03% 0.78%

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Paid to adviser in early years of the

policy’s life

Low Average pot size(7) Making payments(8) No longer making

paymentsAge 55

0.96% 0.90%

8 Mid 1.17% 0.93%

9 HighSmall pot size

No longer making paymentsAge 55

1.98% 0.93%

7. Service StandardsIGC continues to monitor service standards and has placedemphasisonthespeedandaccuracyofprocessingcontributions,transferrequests,andcomplainthandling.Alloftheseareasconsistentlymetorexceededtheirservicelevelsduringtheyear.

There was only one, lower priority, area where service standards have not been consistently met – and that is thespeedofansweringthetelephone(Prudentialaimstoanswercallswithin20seconds).Hereonly93%oftheservicestandardhasbeenmet,howeverthenumberofcallslostthroughouttheyearremainswellbelowexpectedlevelsat1.4%.Managementisawareofthissituation,whichisexacerbatedbypeaksincallvolumes.

InMay2016,threemembersofIGCvisitedthesiteofCapita,oneofPrudential’soutsourcers,toseeoperationsatfirsthandandtotalktoCapita’smanagementwhosupervisethe220staffservicingtheCorporatebook. Weexpecttohaveafurthersitevisitin2017andcontinuetohaverepresentationfromtheserviceoversightfunctionatfutureIGCmeetings.

Thefiguresillustratedhere–whicharefornonauto-enrolledpensionschemes–showsignificantreductionsacrossallpersonas,andavirtualhalvingofchargesforsome.

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8. Communications

8.1 Literature

In my report last year, I said that there was considerable improvement to be made to literature and communications andthatitwouldbeamulti-yearproject.

2016hasshownthatassessmenttobeoptimistic.Prudentialhasdevelopedaframeworkfor“whatgoodlookslike”andtowardstheendoftheyearhasrecruitedacustomeradvocateandestablishedacustomercommittee.IGCwelcomestheseimprovementsininfrastructure.

However,actualprogressonthefirstpieceofcommunicationliteraturedueforredesign–theAnnualBenefitStatement-hasbeeninadequateandtooslow.Adesign reducing the previous 24 pages to a mere 12 still fallsshortofIGC’saspirations;andimplementationofthe12-pageversionhasnowbeendeferredtothesecondhalfof2017,followingdiscoveryofmultipleprocesseswhichdependeduponandfedofftheold24-pagedesign.

InourviewPrudentialmustfindawaytore-designitsprocessesandovercomethebarriersfrommultiplecomputersystems,ifitisevertoachieveitscustomerserviceaspirationsinacost-effectiveway.

IGC recognises the difficulty and expense of the management task, but has to report that at the end of 2016, it is dissatisfied with the progress achieved.

8.2 Understanding the Customer Perspective

During2016,weencouragedPrudentialtoparticipateinindustry-widemarketresearch,bothqualitativeandquantitative,tofindoutmoreaboutwhatcustomersreallyvalueandhowPrudentialwasperformingindeliveringtotheirexpectations.

MembersofIGCattendedsomeoftheearlyfocusgroupstogetfirst-handexperienceoftheissuesbeingraised.

ThequalitativephasereportedinNovemberand,unsurprisingly, revealed that customers were not confidentaboutpensionsandfoundmanyaspects,suchasinvestments,off-putting.

ThequantitativeresultswerereceivedinJanuary,andwhilethey must be treated with some caution (as members admittedtheydidn’tknowanawfullot),theyneverthelessrevealedaconsistentlistofmostvaluedfeatures.Thisshowedunequivocallythatmembersweremostinterestedinthelevelofreturnstheyachievedontheirsavings,whichalignswithIGC’sviewofwhatismostimportant.

ThisresearchwasmadepubliclyavailableinMarch2017.

The research also asked members how well their provider deliveredthefeaturestheyvaluedmost.Prudentialwaswell regarded on this measure, ranking above the median forsixoutofsevenfeatures.

8.3 Employer Engagement

IhavemetwiththemanagementcommitteesoffivemajorEmployersduringtheyeartoexplainwhattheIGCdoesandtodiscusstopicsofinterest.

InNovember2016MembersofIGCmetwithPrudentialstaff,anumberoflargeemployers,abehaviouralconsultantandamemberofthePensionsPolicyInstitute(whoareresearchingEngagement)todiscussthebarriersthatpreventmembersfromtakingmoreofanactiveinterestintheir pension, and how best to help members consider the adequacyoftheirpensionsavings.

Thisinitialmeetingwasexploratoryandanumberof issueswerehighlightede.g.

– How best to help employees manage their overallfinances

– Segmentingemployeesintodifferentgroupswithdifferentneeds

– Thechangingshapeofretirementandworkinglonger–shouldweanchoraround70ratherthan65?

– Roleoftechnologyandengagingcalculationengines(whatif?)

– Setting incremental, manageable goals, and show therealcostofincreasingcontributions(taxrelief,employermatchingetc).

In2017,wewouldliketobuildonthisnetworkofEmployersandalsoengagewithanumberofsmallerEmployerswhowillfacedifferentchallenges.

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9. Plans for 2017Goingforwardinto2017theIGCwillprioritiseimprovements to customer communications, address underperformingfunds,continuetoassesstheWith-Profitsfundsandprogresstheadoptionoftherightglidepaths formembers.

9.1 Charges

Attheendof2016,wehavelargelyachievedthereductionsinchargesweaskedfor.Thereissomecontinuingworke.g.;

9.1.1Finishoffthelooseendsonhigher-chargingfunds

9.1.2ImplementtheFCAmethodologyformeasuringtransaction costs

9.1.3Re-examinethejustificationforWith-Profitsfundchargingmorethan1%.

9.2 Investments

Attheendof2016,wehaveenjoyedaperiodof above-trendfundgrowth.Soagain,thereissome continuingworke.g.;

9.2.1Acceleratetheadoptionofbetterglidepathstomatch Pensions Freedoms

9.2.2Ensurethe“Watch-list”processworksinthecustomer’s interest

9.2.3Monitortherelativeefficiencyofdefaultfunddesignasassetclassesareaddedorremoved.

9.3 Employer and Member Engagement

Attheendof2016,wehaveexploredthecustomerperspectiveandhavesetupaNetworkofEmployers.In2017weintendto:

9.3.1ContinuemeetingswithanEmployerNetworktoimprovememberengagementandcontributionadequacy

9.3.2ContinuetopressPrudentialtoimproveitscustomercommunications,seekingtoby-passthelimitationsoflegacycomputer systems

9.3.3BuildontheCustomerMarketresearch.

9.4 Other

9.4.1Continuetomonitorservicelevels

9.4.2ChallengePrudentialtoloweritscostsofdoingbusiness,sothatevenbetterValueforMoneycanbedeliveredtoMembers.

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Lawrence Churchill CBE, Independent ChairmanLawrencehasdevotedhislifetomakingfinancialservicesworkforeveryone.

AswellasbeingCEOofthreeinsurancegroups,LawrencechairedtheRaisingStandardsQualityMarkSchemefortheAssociationofBritishInsurers,andwasaboardmemberofthePersonalInvestmentAuthorityandoftheFinancialOmbudsmanService.Totallyindependent,theombudsmandealswithcomplaintsagainstfinancialfirms.

To protect pensions where their employer goes bust, LawrencesetupthePensionProtectionFundforthe UKGovernment.

HeisalsoaformerboardmemberoftheBoardforActuarial Standards – setting technical and communications standardsforactuaries.

Morerecently,LawrencesetupNESTfortheUKGovernment.Thisgivespeopleonmodestincomesapensionproviderdesignedspecificallyforthem.

He currently chairs the Financial Services Compensation Scheme.Thisorganisationgivesusprotectioniffinancialfirmsgobust.

In2016LawrencewasappointedChairmanofthePensionsPolicyInstitute.

Lesley Alexander, Independent MemberManagingdirectorofemployeecommunicationscompany,FerrierPearce,LesleyisafellowandcouncilmemberofthePensionsManagementInstitute.

LesleyisalsochairoftheUKSustainableInvestmentandFinanceAssociationandistheformerCEOofHSBCBankPensionTrust(UK)Ltd.

Shehasuniqueexperienceandinsightintothepracticalapplicationofbehaviouraleconomicstoemployeeretirementsavings.

Lesley takes a passionate interest in how clearly we tell you whatisgoingonandexplainthings.

John Nestor, Independent MemberJohnbringsconsiderableexpertiseininvestmentstrategyandassetmanagement.JohnisaClientDirectorofCapitalCranfieldPensionsTrusteesLimited.

HewasmanagingdirectorofbothUBSGlobalAssetManagementandCitigroupAssetManagement.

JohnischairoftrusteesfortheMaryleboneCricketClub(MCC)PensionSchemeandatrusteeoftheRACStaffPensionScheme.

Johnisanexpertonhowwell,andhowreliably,yourpensionpotshouldgrow.

Ed Bridge, Prudential Appointed MemberEdisasolicitorforPrudentialUK&Europe’sbusiness.Heleadsateamoflawyerswhooverseelitigationandlegalregulatoryissues.Edalsogiveswidercommerciallegaladvice.

BeforejoiningPrudentialin2011,EdwasasolicitorwithShearman&SterlingandCovington&Burling.

Michael Payne, Prudential Appointed MemberAqualifiedactuary,MichaelisafinancedirectorforPrudentialUK&Europe.HeisresponsibleforallreportedprofitandcapitalmetricsfortheUKbusiness.

OverhistenyearsplusatPrudentialUK&Europe,Michaelhasheldanumberofsenioractuarialandfinanceroles.Beforejoiningthecompany,MichaelworkedatScottishWidowsnowpartofLloydsBankingGroup,ScottishFriendlyandScottishAmicable.

Appendix IGC Member biographies