Document: Financial Conduct Authority (FCA) - Proposed Rules for IGCs CP14/16
Consultation close date: 10 October 2014 for January 2015 final guidance date. IGCs will need to be in place by April 2015 implementation date.
Who is this consultation relevant to? Pension providers (Providers), advisers to Providers, employers with a contract-based Workplace Personal Pension Scheme (WPP), members of a WPP.
Reason for consultation?
An employer will set up a WPP with a Provider. The employer will agree basic requirements with the Provider, which usually include the investment funds that the Provider will make available to members, maximum scheme charges and administration services. The employer will then offer the WPP to its employees, who enter a direct contract with the Provider and accrue a pension savings pot to use at retirement.
An Office of Fair Trading (OFT) market study showed a clear gap in scheme governance of WPPs; a particular concern given their popularity in the auto-enrolment market. The employer had little ability to police the pension contract between its employees and the Provider once the WPP was in place. The Provider acts as a commercial entity and merely does what the member tells it whilst taking fees, and the member is in a weak position to defend his/her own interests through lack of knowledge and bargaining power. There is no equivalent to the trustee in a master trust or an occupational pension scheme, who would review scheme performance and administration.
The OFT concluded that Providers should close this gap through IGCs, and the Association of British Insurers agreed to implement this proposal. This FCA consultation sets out a proposed regulatory framework for Providers to introduce IGCs, and their functions.
- Each Provider will need to put in place an IGC to review its WPPs. An IGC can cover all the WPPs offered by a Provider and smaller Providers can delegate the IGC requirements to an independent firm (called a "Governance Advisory Arrangement" (GAA)). A GAA will have the identical functions to an IGC. It will be up to the Provider to decide whether or not it is appropriate to use a GAA rather than an IGC, based on their market position.
- Where an employer has more than one WPP applicable to its workforce, the relevant Providers can agree to set up a joint IGC to review all WPPs for that employer.
- Both an IGC and a GAA will have a duty to act in the interests of the members of the schemes, rather than the Provider.
- Each IGC will need to have at least five members (which may include corporate members), and the majority of these, including the Chair, will need to be independent of the Provider. The Provider should appoint IGC members through an external search agency or through outside advertising of the position and there will be term limits to maintain independence whilst retaining expertise. Members of IGCs may not be appointed for a term of more than 5 years and will be able to be re-elected once only. Corporate members will not be subject to a limited term so long as the representative for that corporate on the IGC is rotated as if an individual member.
- The IGC will put forward recommendations to the Provider's board, which will have to implement the proposals or explain to the FCA if it chooses not to adopt them. The IGC will have direct access to the FCA if the board does not take action on its proposals and can contact members and the employers as well. Members will have the opportunity to communicate directly with the IGC although the mechanism may vary by IGC.
- Each IGC should have clear terms of reference. These must include a duty to keep the value for money of each scheme under review by balancing the services provided by the scheme WPP against the cost to the members. In particular it will need to:
- make sure that default investment strategies are appropriate;
- review the performance and characteristics of all investment strategies more generally including the associated costs; and
- confirm that the Provider is administering investment transactions promptly.
- When assessing value for money IGCs should have regard to relevant guidance and codes. They should also regard master trust costs as part of their considerations.
- The IGC will need to prepare an annual report on its findings which, along with its terms of reference, will be publicly available. This will help IGCs compare their findings.
- The IGC will need to consider the findings of the ABI's audit of legacy WPPs once published, and make sure that its Provider addresses or has addressed any relevant points.
- Providers must provide the IGC with any information it may reasonably require, and sufficient resources to allow it to do its job. Where an IGC believes it is insufficiently resourced it will be able to approach the FCA to raise its concerns.
What the proposal will not cover
- The current proposal excludes individual personal pension arrangements.
- The Department for Work and Pensions and the Pensions Regulator will continue to govern trust based pension schemes.
- Providers will not need to indemnify their IGC members, although this will be an option.
The FCA's introduction of IGCs is an important step towards the proper protection of members' interests in the UK pension system. It is doubly vital given that many employees will be auto-enrolled into WPPs and will have to deal with pensions for the first time, with all associated risks.
The consultation's proposals appear to us to be reasonable. We do question why the GAA option is only going to be available to smaller firms. There seems no reason for this approach other than an assumption that larger Providers will want to keep their IGC in-house. We think that larger Providers should at least have the option to delegate this function to a competent outside organisation.
The lack of indemnities for IGC members is probably a mistake and the rationale given in the consultation is unclear. However, we can see that this may be an area where the market will govern itself: potential IGC members will probably ask for protections and may not take up posts where this is not provided so the practical impact will be limited.