Ensuring legacy pensions are good value for money will fall under the remit of independent governance committees which are to be a mandatory requirement for all pension schemes from pension freedom day in April, the Financial Conduct Authority has said.
In addition to reviewing exit charges and other fees, the committees will also be required to assess whether the scheme could or should be offering the full suite of pension freedoms from April. They will be able to report failure to follow recommendations directly to the regulator.
This provision comes in the wake of reports showing many schemes, in particular so-called ‘zombie’ schemes no longer open to new business, may not offer the full suite of new freedoms from April.
Charges have been high on the agenda since an Office of Fair Trading report in 2013, which found problems with the workplace pension market including potential conflicts of interest between employers and schemes over egregious charges of more than 1 per cent.
The regulator’s policy statement, published today (4 February), confirms final rules requiring firms to set up and maintain independent committees.
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 clear duty to act independently of the firm. They will also be able to report non-compliance directly to the regulator.
The committees are a “key part” of the improvements in workplace pensions governance, the regulator says, with their role being to represent the interests of scheme members in assessing the value for money of pension schemes.
In particular, the FCA states they will “initially” take up the “challenges” coming out of an Office of Fair Trading audit which cited rip off charges being applied to thousands of pension savers and to provide oversight of the subsequently ordered ‘sampling’ exercise.
IGCs will be expected to review exit fees as part of their general review of charging structures and levels of charges, and make recommendations where they consider that charges are too high.
They will want in the future to consider value for money for scheme members in decumulation following new pension freedoms, which the FCA says it will consider making “a requirement once IGCs have their immediate priorities in hand”.
The regulator added that an IGC may recommend to the provider that it should consider decumulation and retirement income options, in the interests of relevant scheme members, and, if the provider refuses to support this, may escalate that refusal to the FCA.
In December the Independent Project Board’s legacy audit review of charges followed the OFT’s probe, finding that between £23.2bn and £25.8bn of assets under management, out of the £67.5bn audited, were exposed to charges of more than 1 per cent.
It added that up to 40 per cent of legacy money purchase pension schemes are poor value for money as they continue to apply charges in excess of 1 per cent, in some cases affecting thousands of smaller pot savers, in particular more than 3 per cent.