It seems the government is worried about pensions. The gathering pace of auto-enrolment is focusing the government’s efforts on creating a level playing field across the different types of pension schemes operating in the UK.
A key part of this vision is the birth of the independent governance committee, and it is clear IGCs are going to need to grow up fast if they are going to deliver on their parents’ expectations.
What is happening?
New legal standards for contract-based pension schemes follow on from the Office of Fair Trading report on the pensions industry last summer, and they are sketched out in the government’s paper of March this year, entitled Better Workplace Pensions: Further Measures for Savers. They are due to be in place by April 2015.
So why all the fuss?
Regulators have been aware for some time of the so-called “governance gap” in contract-based pension arrangements. Trust-based schemes are run by trustees who have to act in the financial interests of the scheme members, but contract-based scheme providers do not have the same duties. IGCs will be introduced on a compulsory footing by establishing them through FCA rules to make sure that they are consistent across different providers.
IGCs are the government’s way of introducing something that looks a bit like a trustee to contract-based schemes. The problem is, trustees have had many decades to understand what is expected of them, while IGCs have less than a year.
What will an IGC do?
The idea is that the IGC will act as an agent to protect members’ interests – answering a key concern raised by the OFT report – and ensure that there is independent oversight of what the provider of a contract-based pension is doing in terms of governance, administration, charges and default fund strategy.
The IGCs duties will extend from the overarching – for example, an explicit duty to act in members’ interests – to the very detailed, such as ensuring scheme processes are working promptly and accurately. In particular, IGCs will be tasked with identifying and reporting annually on the value for money that members receive.
If the IGC makes a recommendation to the provider, and the provider fails to act on it, the IGC will have the power to make the matter public and to escalate it to the FCA. It will not be able to direct the provider to take particular action but it will be able to name and shame any provider who does not have a good reason for failing to act on an IGC’s recommendations.
What difference will it make?
It is unclear how far the new FCA rules will go to enhance any existing requirements falling on providers. The FCA is expected to consult on this later this year.
The policy intention seems to be targeting comparability between trust-based and contract-based schemes, hence both types of governing body will need to report in standardised formats to deal with charges and value for money.
IGCs will be required to have access to independent advice, putting them in a similar position to trustees of occupational pension schemes. We expect IGCs will seek legal advice on their duties and responsibilities, just as trustees do now, with many areas of overlap between the two.
However, the proposals still maintain some key differences between IGCs and trustees. For example, they contain no express duty for an IGC to have any knowledge or competency, in contrast to trustees who are bound by legal requirements and regulatory guidance to demonstrate “trustee knowledge and understanding”.
Also, in a trust-based scheme, trustees are accountable to the Pensions Regulator. In a contract-based scheme, the IGC and provider will be accountable to the FCA. Common sense suggests that there will need to be a considerable degree of consistency between the two to maintain a level playing field.
Who will sit on IGCs?
The IGC must consist of seven individuals, the majority of whom must be independent of the provider. It is envisaged that these will be drawn from various places, including independent trustee firms and individuals who have knowledge and experience gained from working with occupational pension schemes, as well as people from within the provider’s industry.
However, the extent of member representation on such a body remains unclear, because the proposals are sketchy on details. It is possible, for example, that IGCs will need to engage with member panels as part of their responsibilities.
To be deemed “independent” an IGC member must not be employed by the scheme provider – now or in the last five years – or be paid by them – other than for their role on the IGC board. They also cannot have a material business relationship with the provider – or have had such a relationship within the last three years.
IGCs themselves will need to conclude “whether each independent member is independent in character and judgement”.
The proposals indicate the chairman of the IGC will be responsible for making the annual report, rather than the IGC board as a whole.
We are yet to see whether this is just a responsibility for ensuring it happens or whether this truly is a further layer of responsibility for the chair to take on.
Will IGCs be exposed to liability?
It is likely to be a steep learning curve for IGC members, particularly since some things they are expected to supervise, like value for money, are not yet well defined.
It is envisaged that individuals who sit on an IGC would be protected by a full indemnity from the provider against any liabilities. The thinking seems to be that as well as helping to ensure people are not put off from sitting on IGCs, this will encourage providers to help the IGC carry out their role.
What happens next?
We do not yet know when the detailed results of the consultation and the new FCA rules will be published.
They are expected by the autumn, but if 2014 turns out to be one of the government’s late autumns – it counts so long as it’s out before Christmas – that won’t leave IGCs much time before April 2015 to get up and running.
The sooner that IGCs start talking with providers, and seek legal advice about their terms of reference and liability protection, the better prepared they will be.
Faith Dickson, partner in the cefined contribution team at City law firm Sacker & Partners LLP