Last week, the Financial Conduct Authority (FCA) published its final rules for independent governance committees (IGC), which all providers of workplace personal pension schemes are required to establish by 6 April 2015. The final rules may force providers to extend the remit of their IGC to cover individual personal pension plans. They also contain a new quorum requirement which may create practical difficulties for some IGCs.
The FCA has worked closely with the DWP and the Pensions Regulator in developing its final rules for IGCs to ensure that they are consistent with the new minimum governance standards for occupational DC schemes, where appropriate.
Role and duties
The primary role of an IGC will be to assess the ongoing value for money of its provider’s workplace personal pension schemes, with a particular focus on default investment funds and member-borne costs and charges. Workplace personal pension schemes include group personal pension plans, stakeholder schemes and group SIPPs.
In discharging their role, IGCs will be under a duty to act solely in the interests of active and deferred members of relevant schemes. The final rules make clear that this covers all deferred members of relevant schemes and not just those who become deferred from April. This creates a significant issue for some providers whose historic records do not distinguish between deferred members of workplace personal pension schemes and members of individual personal pension plans (which IGCs are not required to cover). Providers in this position therefore face an unpalatable choice between spending a lot of time and money trying to trace the relevant deferred members (which in some cases may be impossible); and extending their IGC to cover their individual personal pension plans as well.
The FCA has decided not to extend the role of IGCs to cover value for money in decumulation at this stage. However, it has said that it will review this in 2017. In the meantime, providers may choose to extend the role of their IGC voluntarily to cover members’ funds in decumulation if they wish.
Assessing value for money
A big issue not addressed in the final rules is how IGCs should go about assessing value for money. This is new territory and there is no precedent for this. It is important that IGCs adopt a broadly consistent approach so that member protection does not vary significantly from provider to provider. To assist this, the FCA is planning to hold a forum of IGC Chairs around the time that the IGC rules come into force. In our view, the FCA should move quickly after this to produce guidance for IGCs on the principles around assessing value for money and the approach they ought to take to this. Similar guidance should also be produced by the Pensions Regulator for trustees of occupational pension schemes who will be required to assess whether their scheme represents “good value” from April.
We believe that some of the legal principles that have been developed by the Courts in relation to trustee decision-making could usefully be adapted to support IGCs approach to this.
Powers of IGCs
Where an IGC has concerns about the value for money of a relevant scheme operated by its provider it will be able to escalate its concerns to the provider’s Board. Providers will be required to take reasonable steps to address any concerns raised by their IGC or to explain to the IGC, in writing, why they do not intend to do so. If an IGC is not satisfied with the provider’s response it will have the power to escalate it’s concerns to:
- the FCA, and/or
- relevant scheme members and employers.
An IGC can also go public with its concerns. However, in its final rules the FCA has said that an IGC should notifiy it first of any concerns that it has before it raises those concerns with scheme members or employers or goes public with them.
Establishing an IGC
There is a significant amount of work that providers need to do between now and April to establish their IGCs. Most providers have appointed the Chair of their IGC and they are now in the process of appointing the other IGC members. As well as recruiting the members of their IGC, providers also need to:
- agree terms of reference for their IGC
- prepare contractual appointment documents for their IGC members (and update the contracts of employment of IGC members who work for the provider)
- put in place suitable administrative support for their IGC
- identify a day-to-day contact for their IGC and develop a process by which the ICG can escalate concerns to the provider’s Board
- consider what information their IGC might require and, where necessary, update their systems and processes so that they are able to produce this
- ring-fence a budget for their IGC.
IGCs will be required to have a minimum of 5 members with the majority (including the Chair) being independent of the provider. The final rules also contain a new quorum requirement, which will mean that for an IGC to be quorate at least 3 members must be present with the majority of those present being independent. This rule could create a practical difficulty for IGCs, because if one of the independent members is unable to attend a meeting it would mean that the IGC would not be quorate if the remaining four members consisted of two independent members and two provider employee members.
Individual IGC members may be appointed for a maximum single term of 5 years, with a cumulative maximum term of office of 10 years, should they be reappointed. Corporate persons may be appointed as IGC members indefinitely. However, the individual who represents the relevant corporate body can only serve as an IGC member for a maximum of 10 years after which time they will need to be substituted.
Review of IGCs
IGCs will be new governance bodies and the FCA wants to ensure that they are operating effectively. In light of this, the FCA intends to conduct a review of the effectiveness of IGCs in 2017. This will include consideration of whether to extend the mandatory scope of IGCs to scheme members in decumulation. There is also the potential for the requirements for IGCs to be amended by the next Government, following the election in May.
Governance Advisory Arrangements (GAA)
Providers with smaller and less complex workplace personal pension schemes will be able to establish a GAA instead of an IGC. GAAs will be required to perform the same role as an IGC but they will be operated by a third party which is independent of the provider. So, in essence, a GAA is an outsourced IGC.
One of the first tasks for an IGC will be deciding the priority work plan for 2015/16. Although the priorities for each IGC will differ depending upon the nature of their provider’s business and its schemes, the following will almost certainly feature:
- formulating principles for assessing value for money
- assessing value for money in legacy schemes and considering how the provider is responding to the Independent Project Board’s (IPB) report on legacy schemes
- assessing value for money in their provider’s default investment funds, and
- ensuring that the IGC is ready to deliver the regulatory output required from it in year one, including agreeing an implementation plan with their provider in response to the IPB’s report (by December 2015) and producing the IGC’s first annual report.