New pension governance committees will be expected to challenge providers, says expert

Out-Law News | 06 Feb 2015 | 3:30 pm | 3 min. read

The Financial Conduct Authority (FCA) expects independent governance committees (IGCs) to ask "searching questions" of, and to challenge, providers according to newly finalised rules, an expert has said.

Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that many contract-based schemes had already set up or were well into the process of setting up an IGC, which will be required from 6 April. However, providers and the new committees still have plenty of work to do together to ensure that they are in good shape by this date, he said.

"Both parties should be thinking about the practicalities of disclosure, confidentiality, escalation to the FCA and the methodology used for value for money objectives," he said. "That collaborative approach will set the tone for the effective governance of contract-based workplace pension schemes going forward. IGCs will rely on the data and resources of the provider to deliver their duties. In turn, providers and IGCs will need to work together to implement the solutions highlighted by the legacy audit in particular."

"The FCA expects IGCs to ask some searching questions of providers as part of the wider delivery of IGC duties. IGCs will need to challenge providers to negotiate better deals with fund managers and other third party providers, on behalf of scheme members. An IGC may recommend to the provider that the IGC should consider decumulation and retirement income options, in the interests of relevant scheme members. If the provider refuses to support this, IGCs may escalate that refusal to the FCA," he said.

From 6 April, firms that operate workplace personal pension schemes will be required to establish an IGC with at least five members, which will have a duty to act solely in the interests of scheme members independently of employers and providers. The creation of these committees was one of the outcomes of a critical report into the defined contribution (DC) pension market by then-consumer protection watchdog, the Office of Fair Trading (OFT), in 2013. Amongst their roles, IGCs will assess the value for money delivered by these schemes and report on how their schemes meet a range of new quality standards.

The final rules published by the FCA include the minimum standard for the terms of reference for IGCs, the scope of the IGC and what types of firms will need to set one up. According to the rules, IGCs will initially be expected to address the scheme's treatment of deferred members, governance around scheme members in decumulation, effectiveness of communication to scheme members and the need to challenge providers to negotiate better deals from fund managers. Legacy schemes in which members are potentially exposed to high 'reduction in yield' are the priority, as ordered by the industry-commissioned Independent Project Board at the end of last year.

"This is therefore likely to be a busy year for providers and committees, since the policymakers and regulators will be expecting the all-important value for money to be delivered in the  key areas," said workplace pensions  expert Tom Barton.

"There is no prescribed assessment methodology for value for money. There is, however, plenty of guidance around already, for example that published by the Pensions Regulator, and the FCA will hold a forum for ICG chairs around the time that the rules become effective. In each case, it will be critical for each provider to work closely with its IGCs in the construction of the assessment methodology, to make sure it is not inadvertently placed at a disadvantage in the workplace pensions market," he said.

As the regulator of contract-based workplace pension schemes, the FCA has been working closely with the Department for Work and Pensions (DWP) and the Pensions Regulator, which regulates trust-based schemes, to ensure that all pension scheme members benefit from the same quality standards. This week, the DWP presented draft regulations to ensure pension scheme value for money to parliament. If, as expected, these regulations are approved a 0.75% charge cap on default funds in auto-enrolment schemes will be introduced from April along with a ban other charging practices, including active member discounts for those still paying into their pension.

"Over five million people have now been automatically enrolled into a workplace pension and, by 2018, millions more will be saving for the first time or saving more," said Steve Webb, the pensions minister. "This is why we are building a pensions system that these workers can save into with confidence - and not see their money disappear in opaque charging structures."

"There is an understandable buzz around what April will bring for those retiring now, with the unprecedented pension freedoms coming in. But these reforms show we are also determined to help the pensioners of tomorrow – people working hard and saving hard for their families' future," he said.

The FCA and DWP will publish a joint call for evidence on full disclosure of other costs and charges in the spring, according to the government's announcement. The government will review the level of the default fund charge cap in 2017, at the same time as the FCA is planning a review of the effectiveness of IGCs.