FCA finds mixed performance by pension scheme governance committees

In a review into IGCs and Governance Advisory Arrangements (GAAs), the FCA found that some IGCs lacked necessary independence and were ineffective at challenging firms or escalating unresolved issues. The regulator said IGCs which maintained independence from the firms whose pension schemes they had responsibility for delivered better outcomes for pension scheme members.

The review (24 page / 664KB PDF) also found that GAAs operated by third-party firms on behalf of pension providers were less effective at delivering meaningful improvements in value for money.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law, said many of the issues identified by the FCA would be fairly straightforward for IGCs to resolve.

“The FCA has noted some successes, particularly material cost reductions since the introduction of IGCs. However, there are weaknesses – notably independence, information gathering, reporting and disclosure,” Barton said.

“Digging into the detail of the thematic review reveals that much of this about documenting and following process and procedure – which in some respects may make it a relatively easy fix,” Barton said.

The FCA has sent feedback letters to firms to ensure they make improvements to the way they work with their IGCs or GAAs.

The regulator has also launched a consultation (44 page / 1MB PDF) on proposals aimed at making it easier for IGCs and GAAs to compare the value for money of pension products and services. The consultation focuses on whether there is a need for clearer rules and guidance for IGCs on assessing value for money, and proposes a framework for the annual assessment process including a definition of value for money and three key elements of value.

The FCA is also proposing to introduce a requirement for IGCs to assess whether their pension providers offer value for money compared to others on the market.

Barton said the role and terms of reference of IGCs were heavily prescribed by FCA rules, and it was vital for IGCs and firms with an IGC to map out roles and responsibilities in accordance with underlying FCA rules and terms of reference – and then act accordingly.

“This can sound like downgrading the often admirably lofty ambitions of IGCs to ‘mere compliance’ – but it’s far from it,” Barton said.

“Anchoring the work done by IGCs in the terms of the FCA rules ensures that the output serves the original purpose of filling the perceived governance vacuum in workplace personal pension schemes. That is really what the FCA’s effectiveness review is all about,” he said.

“Governance bodies generally will be well served by starting with the basics, getting that spot on and then layering the best practice and more ambitious plans up on top. It’s important to get this right now more than ever as the remit of IGCs is extending into the world of retirement, income drawdown, environmental, social and governance investing, and possibly a much wider range of pensions, savings and investment products,” Barton said.

The FCA consultation is open until 24 September. The FCA said it is planning to publish a discussion paper in partnership with the Pensions Regulator to review possible options for metrics to measure and benchmark value for money in pensions. 

IGCs were introduced to the pensions market in 2015, in the wake of a critical report into the defined contribution pension market by then-consumer protection watchdog, the Office of Fair Trading in 2013.