Out-Law Analysis | 08 Jun 2016 | 12:14 pm | 4 min. read
Established in April 2014 in response to then-consumer protection watchdog the Office of Fair Trading's critical report into the defined contribution (DC) pension market, IGCs were set up to fulfil broadly the same role for members of workplace personal pension schemes as trustees perform in occupational pension schemes. IGCs have a duty to act in the interests of scheme members, independently of employers and providers; and must annually report on the scheme's value for money and performance against a range of quality standards.
The IGCs have now all published their first annual reports with a mix of styles and approaches - and even a few that don't appear to tick off all the compliance content required under Financial Conduct Authority (FCA) rules. But despite the different approaches, what comes across very clearly is a desire among IGC chairs to deliver something meaningful for policyholders, to the extent permitted by the regulatory regime, according to pensions law expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com.
"This is an important sentiment, because it goes to the heart of why IGCs were established in the first place," he said. "And although much of the associated action may trouble providers to varying degrees, there's a general recognition that it needs to be done. After all, the success of IGCs generally will go a long way in keeping the Competition and Markets Authority at bay."
In its DC pensions market study, the OFT concluded that the legal test for making a market investigation reference to the competition authorities had been met. However, it ruled out making such a reference at the time due to the regulator's commitment to introduce IGCs and conduct a legacy audit of scheme charges.
At a recent seminar hosted by Pinsent Masons and Capita, the employee benefit consultancy, industry experts reviewed the solid start delivered by the IGCs during their first year of operation, as well as the work that still needs to be done to help the IGCs develop their own identities. Standards in DC continue to evolve, as will the activity of IGCs and the content of the annual report covering that activity.
All providers are now committed to prioritising action in relation to so-called legacy schemes. Implementation plans were drawn up with the IGCs over the course of last year and many of these were reported on in the annual reports recently published by the IGCs. In a number of cases providers have agreed to switch policyholders into new schemes or investments with lower associated charges.
But Barton said that providers would find it challenging to implement these switches on a bulk basis even though this sort of activity is routinely performed by trustees of trust-based pension schemes.
"The regulatory regime is unhelpfully restrictive, and hinders the sort of bulk changes that are routine in trust-based occupational pension schemes. The policymakers and regulators know about this, but have shown little enthusiasm for giving providers the same sort of powers as trustees, perhaps in conjunction with IGCs. This means delivering on implementation plans will need careful consideration of policy terms, consumer protection legislation and an analysis of legal risk," he said.
Value for money
All DC workplace pension schemes are subject to value for money assessments by an independent body. In relation to workplace personal pension schemes the independent body in question is the IGC. The concept of value for money does not have a precise definition.
Unsurprisingly, finding out what scheme members actually value has been one of the biggest challenges for IGCs in their first year of operation, given the historical problems created by the lack of engagement by scheme members, according to Gary Smith, head of DC pensions at Capita.
"Getting a clearer picture of what is of value to and valued by members is an important part of the regulatory framework - and will need to develop over time," he said.
The issue arises because FCA rules require the IGC annual reports to set out the arrangements put in place by the provider to ensure that the views of relevant policyholders are directly represented to the IGC.
In many cases, group personal pension schemes also have to deal with a "multiplicity" of default funds, developed either due to changes introduced by the provider or due to bespoke investment strategies designed by consultants, Smith said. This creates further challenges for IGCs, given their accountability for the suitability of each of these default strategies for discrete membership demographics.
Getting to grips with IGC duties
The FCA rules also require IGCs to look after the interests of policyholders, both as a collective and as individuals.
"This is a delicate balancing act, and demands a strong understanding of the policyholders, their interests and concerns," Barton said. "This is a key element of value for money assessments"
The problem is that this IGC duty is not quite the same as the more familiar duty in trust law to look after member interests. According to Barton it is important to bear in mind that the rules developed by the FCA for IGCs are "not a mirror" of the duties applicable to trustees under trust law.
"The similarities are there and, in general, taking a trustee-like approach is not a bad starting point for an IGC," he said. "But, when there are difficult decisions to make, IGCs need to be sure that they are playing by the right rules. Acting outside of their remit could do more harm than good – and could even have unwelcome consequences for committee members."
Action undertaken in 2016 will reported on in further annual reports in April 2017. In the same timescale the FCA will undertake a review of the effectiveness of IGCs. The review will assess how effective IGCs are in helping pension providers deliver value for money for workplace pension policyholders. This will include their effectiveness against the legacy audit recommendations.
Tom Barton is a pensions law expert at Pinsent Masons, the law firm behind Out-Law.com.
Gary Smith is head of defined contribution pensions at Capita