IGC Chair’s Annual ReportA Report to Members

March 2016

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Chairman’s introduction

I am excited to have been chosen for this important task especially at a time of great change in pensions.”

The core role of the Independent Governance Committee (IGC) is to assess the value for money provided by Zurich for people like you who are saving for your retirement. Our first year as an IGC has been busy and we have already made a difference. Some concrete first steps have been taken to improve value for money for many members.

I believe the work of Independent Governance Committees like ours is important to give you the confidence and encouragement that you need to save for your retirement.

Laurie Edmans

For words and phrases highlighted in BOLD, please refer to the glossary on page 8.

This was my comment when I was appointed as Chairman of the Zurich Independent Governance Committee in January 2015. I believe that the excitement was justified and the importance of the task has become increasingly evident.

This is a key challenge for the UK because for most of us state pension provision alone will not provide the standard of living in later life which we expect.

Saving into a pension scheme is the best way of addressing this. This is why the Government now requires that most new workers are automatically enrolled as a member of a pension scheme. It means that our work will be important for an even larger group of people.

My four key messages are:

1. Our independence and consumer focus is clear. I am proud of the team that has been put in place. Our IGC is made up five people who are all independent of Zurich.

Our Committee cares about customers and has individuals who bring many years of experience in campaigning on behalf of consumers. Our brief is to start with what consumers value and then apply it to pensions, rather than start with pensions and to graft on consumer views.

2. Our relationship with Zurich is constructive. Zurich has been supportive of our work and has also responded well to challenges from the IGC. Our Committee has worked closely with senior Zurich executives whilst maintaining our ability to act independently.

3. Our actions to date will further improve value for money for you. During our first year, our primary focus has been responding to the recommendations of a review of the industry carried out in 2014. This review focussed on older pension schemes which are not subject to rules which apply to modern pensions.

In 2015, we have assessed value for money according to the criteria laid down by that review. This has involved:

• Ensuring we have all the information we need about Zurich’s products and services; and

• Evaluating Zurich’s response to the recommendations from the review of the industry. Zurich is making some large changes to older pension schemes in response to challenge from the IGC, most notably the introduction of an upper limit on charges.

4. Our future plans are to better understand what you think value for money is, and apply what we learn. We are committed to assessing value for money in a consumer focussed way. We have concluded that our assessment of value for money will carry more weight if it is based on a deeper understanding of what you think value for money is. In order to go beyond the criteria set by the review of the industry we need significant input from you.

To achieve this Zurich have agreed to carry out, under the leadership of the IGC, a big programme of consumer research. Our ongoing assessment of value for money will be based on what consumers say matters about value for money.

We have a lot to do in 2016. Any actions we take should reflect what matters most to Zurich’s customers. My personal belief is that meeting your expectations is a crucial factor in assessing value for money. But we shall see what you think and base our views on what you tell us.

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What have we done to date?

The Zurich IGC began its work in March 2015. Our core role is to assess the value for money provided by Zurich for people like you who are saving for your retirement.

Our primary focus during 2015 was to assess value for money according to the criteria laid down by the review of the industry. The IGC concentrated on two things in our first year to achieve this:

• Making sure that we have the information we need to allow us to assess value for money; and

• Evaluating Zurich’s response to the recommendations from the review of the industry focussed on older pension schemes.

Having the right information to assess value for money

Zurich has produced detailed information to meet the requirements of the IGC. Our Committee reviews this information regularly. We have been evaluating:

1. How your money is invested;

2. How your pension fund is growing;

3. Whether service is good; and

4. What charges are being taken from your pension fund.

We are not able to review data for members on an individual basis. Rather, the Committee reviews data across a range of measures and has challenged Zurich where we have found exceptions which may be indicators that pension schemes are not delivering value for money.

Our Committee believes that Zurich has equipped the IGC with the right information to enable us to assess Zurich’s proposed actions in response to the review of the industry. The information provided has also helped our Committee to ask questions of Zurich in relation to how it delivers value for money to you.

Evaluating Zurich’s response to the review of the industry

To respond to the recommendations from the industry review of older pension schemes, in 2015 our Committee has focussed on:

• Ensuring that all relevant members had been identified. We were satisfied that they had been.

• Evaluating actions proposed by Zurich, to ensure value for money for members in older schemes. In keeping with the approach of the review, our Committee has focussed on three areas:

1. Members exposed to high charges;

2. New joiners exposed to high charges; and

3. Members exposed to charges when they leave or switch pensions.

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Taking each area in turn:

1. Members exposed to high charges: Zurich will introduce an upper limit on charges. The upper limit will apply to all funds. This upper limit will mean that, for the vast majority of customers, it is reasonable to expect that the value of their fund will at least keep up with inflation. Of course, we are making an assumption – that in the long run, the future for investments is similar to the past. This can’t be guaranteed.

We had particular concern for members with small pension funds. These members will be among those who benefit most from the upper limit being introduced on charges. Zurich has committed to a series of further activities for these members designed to assist them to take action to move to a more modern style pension scheme:

a. Zurich has conducted customer research to inform how best to engage with savers with small pension funds;

b. Zurich is alerting such customers about their charges when they are contacted by the customer; and

c. Zurich will be writing to members with small pension funds with a clear call to action.

2. New joiners exposed to high charges: There are small numbers of members who continue to join older style pension schemes. The features of these schemes may mean that it is in the best interests of these members to join a more modern style pension scheme. But there is no hard and fast rule.

Zurich will examine each of these schemes on a case-by-case basis in the course of 2016. We will review Zurich’s work to find the best overall outcome for members and employers. We will also monitor whether the number of people joining older style pensions reduces in line with Zurich’s expectations.

3. Members exposed to charges when they leave or switch pensions: Before the IGC was established Zurich had already taken action in this area. Zurich’s action applied to all pension policies:

• For all members aged over 55, Zurich introduced an upper limit on charges for leaving or switching pensions. From April 2015 these customers can take advantage of new options under the Government’s ‘Freedom and Choice’ pension legislation.

• For the limited number of members aged over 65 who were exposed to them, Zurich has removed all charges on leaving or switching pensions.

The Government has announced plans to make new laws in this area. We will return to review Zurich’s actions in 2016 as more details emerge about the Government’s plans.

The Committee’s opinion of Zurich’s response so farOverall, Zurich’s management responded constructively to challenge from the IGC throughout this process. If Zurich had not responded to our satisfaction, we could have raised the issue with the regulator – the Financial Conduct Authority. We have not needed to.

It is the opinion of our Committee that the actions taken and proposed by Zurich are appropriate first steps. We will report back on the impact of these actions in our next annual report.

We also concluded that our assessment of value for money will carry more weight if it is based on a deeper understanding of what you think value for money is. In order to go beyond the criteria set by the review of the industry we need significant input from you. It is from that position that we have planned what we will do next.

We spent considerable time examining possible courses of actions in each of these three areas with Zurich. Zurich has adjusted their approach in response to challenge from the IGC and has committed to making some important changes for many of you.

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What will we do next?

Our plans for 2016-2017 are to:

• Continue to assess whether value for money is being delivered to you according to the criteria laid down by the review of the industry. We will review whether the actions taken by Zurich are doing enough for those concerned.

• Lead a new programme of research to better understand what you think matters about value for money;

• Apply what you say matters about value for money to what has been done to date by Zurich; and

• Challenge where we feel further improvements should be made for you.

The consumer research programme is at the heart of our 2016 plans.

We recognise the difficulty many consumers have in engaging with issues relating to long-term financial products and pensions. However, we have decided that we must understand the issue from the point of view of consumers themselves rather than relying primarily on the views of academics, regulators, employers, advisers or pension companies.

Our research programme will:• Identify consumers’ views of what elements of pensions

provide value for money for them; and

• Classify and rank the relative importance to consumers of different elements of value that consumers identify.

The IGC is requiring an approach to consumer research which is different from that which Zurich has previously employed. We are fortunate in having individuals on the Committee who have experience in solving similar challenges in other industries. A leading market research organisation has been hired to carry out the research according to the IGC’s specification. The programme will run through 2016. The cost is substantial and Zurich has agreed to fund this.

The research will help our Committee to move beyond the criteria laid down by the review of the industry. Once we have established a framework for assessing value for money which we are confident is rooted in your views we will apply this to our assessment of:

1. How your money is invested;

2. How your pension fund is growing;

3. Whether service is good; and

4. What charges are being taken from your pension fund.

We are committed to assessing value for money in a consumer focussed way. Our assessment will be driven by what you say matters about value for money and by what is important in the specific circumstances of Zurich’s pension members.

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Appendix to IGC Chair’s Annual Report: Background to the Zurich IGC

State pension provision alone will not result in most people having the standard of living in later life which they expect. This is a key challenge for the UK and for the Government. This is why the Government now requires that most new workers are automatically enrolled as a member of a pension scheme. Automatic enrolment in workplace pensions is the Government’s flagship policy to address the challenges of an aging UK population and the need to support adequate pensions saving in future.

In light of the introduction of automatic enrolment the Office of Fair Trading launched a study in 2013 into the market for defined contribution workplace pensions. Later that year the Office of Fair Trading published their finding – that competition in the industry alone cannot be relied upon to drive value for money and good outcomes for members.

The report set out a series of recommendations aimed at improving the governance of defined contribution workplace pension schemes. These included:

1. Introducing Independent Governance Committees to be embedded within companies to improve scrutiny of value for money on behalf of members; and

2. Undertaking a review of the industry focussed on workplace pension products identified as being at risk of giving poor value for money to reduce risks of consumer detriment.

During 2014, a review of the industry was conducted by an Independent Project Board. In parallel, the regulator, the Financial Conduct Authority, consulted with the industry on the establishment of Independent Governance Committees.

The review of the industry concluded in December 2014. Two key recommendations arising from this review were for:

1. Companies to review data on schemes and identify actions that could be taken to improve outcomes for savers and to prevent new savers joining poor value schemes; and

2. Independent Governance Committees to evaluate companies proposed actions, and make recommendations on which course of action will be most effective to ensure value for money for savers, and agree an implementation plan with the companies’ Board.

Across the industry, the Independent Governance Committee has been introduced by regulation to act on behalf of members of contract based defined contribution workplace pension schemes.

The Zurich Independent Governance Committee was established in March 2015. The core role of the Zurich IGC is to assess the value for money provided for members of schemes provided by Zurich.

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Appendix to IGC Chair’s Annual Report: IGC expertise and independence

The Zurich Independent Governance Committee is wholly independent, as measured against the guidance on independence set out by the Financial Conduct Authority.

Pen profiles of the IGC members are set out below:

Laurie Edmans CBE, Chairman: Laurie has wide experience in leading pensions and life assurance businesses and was a founder board member of NEST, of the Pensions Regulator and of the Money Advice Service. He chairs the defined contribution pension plan for Trinity Mirror plc. He was appointed CBE in 2006 for services to pensions reform.

Anna Bradley: Anna is a long-standing consumer advocate. Anna worked at Which? for many years, and is a former CEO of The National Consumer Council. Anna also chairs consumer oversight bodies in a variety of other sectors, including health, water and rail.

Ken Hogg: Ken Hogg is a fellow of the Institute and Faculty of Actuaries with more than two decades of executive experience in the life insurance industry. Ken was also formerly a Director of the Insurance Sector at the Financial Services Authority – the predecessor of the Financial Conduct Authority.

Virginia Holmes: Virginia brings valuable pension and investment expertise to the IGC from both executive and non-executive experience with some of the UK’s largest pension schemes, including those of the Universities Superannuation Scheme, the Post Office, and British Airways.

Robert Laslett: Robert brings extensive regulatory experience to the IGC, as a previous director at the Office of Fair Trading and the Department for Work and Pensions, where he was also Chief Economist for Pensions. Robert is also a member of the Civil Aviation Authority Consumer Panel.

The IGC can be contacted directly by using the email address:

independentgovernancecommittee@zurich.co.uk

Or you can write to the IGC at the following address:

Zurich IGC Chairman, The Grange, Bishops Cleeve, Cheltenham, GL52 8XX

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Appendix to IGC Chair’s Annual Report: Glossary of terms

Member: An individual who has contributed and/or continues to contribute to a pension scheme.

Pension Scheme: A pension scheme is a way for an individual, or their employer, to save money for later in their life. The role of the IGC is specific to members of certain types of pension schemes – those which are contract based, defined contribution, workplace schemes. Where the term pension or pension scheme is used in this report, it refers to contract based defined contribution workplace pension schemes. The meaning of these terms is set out below:

Contract Based: A contract based scheme is where an employer appoints a pension provider, such as Zurich, to run the plan. The members sign a contract with the provider who will be responsible for the operation of the scheme.

Defined Contribution: Defined contribution workplace pensions are a type of workplace pension plan where retirement benefits are based on how much the member and employer pay into the plan and the performance of the investments made with the money invested.

The benefits that a member receives at retirement depend on a number of factors including:

• How much has been paid in by and/or on behalf of the member;

• The length of time that it has been invested;

• How the investments have performed over this period; and

• The charges taken.

Workplace Pension Scheme: Workplace pension schemes, or workplace pensions, are schemes that are set up by employers to provide their employees with a pension in later life.

Automatic Enrolment: Automatic enrolment is a Government initiative to help more people save for later life through a pension scheme at work. Automatic enrolment has made it a legal requirement for employers to enrol their employees into a pension scheme if certain conditions are met.

Value for Money: Value for money is a term used to assess the utility derived from a product or service. Value for money is based on the purchase price, the efficiency and the effectiveness of the product or service.

Zurich: Zurich is one of the world’s largest insurance groups. Zurich’s mission is to help its customers understand and protect themselves from risk. In the UK, there are two Zurich companies which provide pension schemes: Zurich Assurance Ltd (ZAL) and Sterling ISA Managers Limited (SIML). The Zurich Independent Governance Committee acts on behalf of members of contract based defined contribution workplace pension schemes provided by both ZAL and SIML.

Consumer Research: Consumer Research is a form of market research in which the needs and opinions of consumers are identified, especially with regard to a particular product or service.

’Freedom and Choice’: ‘Freedom and Choice’ refers to new pension legislation introduced in the 2014 Budget. The ‘Freedom and Choice’ legislation gave people much greater freedom over how they access their pension savings.

Regulator/Regulation: A regulator is a person or body that supervises a particular industry or business activity. Regulation refers to principles, rules or law which are issued by regulators and are designed to control or govern conduct within a particular industry or business activity.

Financial Conduct Authority: The Financial Conduct Authority (FCA) is an independent body which is responsible for regulating financial markets. Its aim is to make sure that financial markets work well so that consumers get a fair deal.

Office of Fair Trading: The Office of Fair Trading (OFT) was a Government department whose goal was to make markets work well for consumers. The OFT was superseded from April 2014 by the Competition and Market Authority.

Independent Project Board: The Independent Project Board (IPB) was responsible for overseeing the review of the industry which focussed on charges and benefits in older defined contribution workplace pension schemes.

Zurich is a trading name of Sterling ISA Managers Limited. Sterling ISA Managers Limited is registered in England and Wales under company number 02395416. Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX.

Zurich Assurance Ltd. Registered in England and Wales under company number 02456671. Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX.

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