Diversity and Inclusion - best laid plans
Fintech meet up
Out-Law Analysis | 03 Mar 2015 | 10:46 am | 4 min. read
While many contract-based pension scheme providers already have an IGC in place to oversee their schemes from 6 April, we can expect much frantic activity over the next month as final appointments are made and committees get to grips with their new roles. The Financial Conduct Authority (FCA) only published its final rules at the beginning of February, but the thrust of the regulatory measures has been well known for some time, dating back to the Office of Fair Trading (OFT) review of the defined contribution (DC) pensions market in 2013.
IGCs are such a new concept that it is inevitable that they will remain a work in progress for at least the first few months of the new regime. Critics including shadow pensions minister Greg McClymont have already claimed that IGCs as proposed will not provide the same level of protections for savers as trustees. But the thing that really makes for good governance is not the model; it is the expertise and enthusiasm of the individuals involved, financial backing and access to quality advice. We're thinking too narrowly if we try to debate the relative merits and demerits of trustees versus IGCs.
Speaking on a panel at the ABI's 2015 Retirement Conference last week, I told delegates that the quality of IGC appointments gives good ground for optimism that IGCs will succeed in addressing the historical weaknesses identified by the OFT in its 2013 review. Committee members may not have a fiduciary duty, but they do have a statutory duty to deliver the same sort of outcome as trustees. They also have a great deal of experience making difficult judgement calls for the benefit of savers, in a commercial context.
Even at this early stage, the influence of IGCs on providers is already becoming clear. The phrase "what will the IGC make of this?" is creeping into proposition meetings – a clear and constructive acknowledgement that IGCs are a voice to be heard in relation to the workplace pension proposition.
That is not to say that the IGC framework as it currently stands is perfect. While IGCs will be responsible for assessing the value for money of contract-based schemes as well as ensuring minimum governance standards, we are without a consistent assessment methodology.
As things stand there is a risk of IGCs prioritising different considerations which then makes any benchmarking very difficult – a particular concern in a market that has been criticised for its lack of transparency and competitiveness. Inconsistency will do little to improve member-borne charges for savers and make it difficult for IGCs (and employers when selecting schemes) to understand true value for money. It could even potentially impact on a given provider's competitiveness in the market. We need to take measures to stop the solution creating yet another problem.
More important, however, is the barrier which providers and IGCs will need to overcome to deliver value for money. The FCA's final rules make it clear that IGCs will be expected to challenge providers on value for money considerations, encouraging them to negotiate better deals with fund managers and other third parties and escalating failures to support their recommendations to the FCA when necessary. However, where more complex factors affect a scheme's value for money, an IGC may not be able to take as effective action on behalf of savers as the trustee of an occupational pension scheme.
The priority for IGCs is the provider's legacy schemes. Implementation plans must be presented to the Independent Projects Board (IPB) by the end of this year. Providers and IGCs will be required to report on how they plan to drive down the highest charges, and commercial pressures are such that this cannot always be as simple as slashing prices. Legacy schemes, platforms and investments are often underpinned by out of date saver policies and administration systems. Behind the scenes, savers will need to be moved into fit for purpose schemes, platforms and investments and we cannot expect savers to engage with this process. Unanimous consent is not realistically possible. This means providers and IGCs are likely to conclude that the best way forward is without consent transfers and investment switches. This is a risky enough business where the underlying saver policies seem to permit it. It is riskier still where they do not. Pension scheme providers may well end up between a regulatory rock and a hard place, torn between action which could lead to future criticism from savers – and inaction which could undermine the policy objectives for legacy schemes.
Is the solution for providers to offer an underpin to those they transfer to new schemes, platforms and investments? This would protect savers by offering the better of the outcome from the new scheme and from the old scheme, on retirement. It would also represent an additional cost and an ongoing administration burden. This being the case it feels like something which should be regulated for, if it is to be required of providers. And it is questionable whether it should be required of providers who have, along with an independent IGC, formed a view that scheme transfer or investment switch is the generally the best thing for savers.
The better solution is to adopt the same powers available to trustees of occupational pension schemes which have a track record of protecting savers. This means that once IGCs and providers have satisfied themselves that the transfer is in saver's interests, they should be able to rely on a tried and trusted process to deliver a discharge from future liability.
Tom Barton is a pensions expert at Pinsent Masons, the law firm behind Out-Law.com.
Diversity and Inclusion - best laid plans
Fintech meet up