Regulatory rules require that workplace pension providers have to establish and maintain Independent Governance Committees (IGCs).

In our latest insight, we look at what IGCs are, what they report on, and new rules surrounding their operation that came into force in February 2021.

Initial rules from the Financial Conduct Authority (FCA) came into force in April 2015, requiring workplace pension providers to appoint an Independent Governance Committee (IGC).

The FCA introduced IGCs in response to a 2013 Office of Fair Trading market study of workplace pension schemes. The study revealed competition problems and potential conflicts of interest amongst workplace pension providers.

Some workplace pension providers operating smaller and less complex schemes are allowed to establish a Governance Advisory Arrangement (GAA) with a third party as an alternative to an IGC. However, the provider must make sure to establish the GAA on terms that secures its independence.

When considering whether to setup an IGC or a GAA, the workplace pension provider should take into consideration the number of policyholders it has in schemes, the funds it holds under management, and the number of employers.

Any scheme that operates on multiple IT systems, has multiple charging structures or offers access to investment funds owned by a parent company will be considered complex and will necessitate an IGC is setup rather than a GAA.

Where a workplace pension provider is part of a larger financial group, the ICG of the parent company can cover the scheme.

The regulator sees IGCs as a vital part of its range of protections to ensure workplace pension schemes deliver value for money for members. Therefore, it compels providers to support IGC members by providing them with any information they ask for. They must act solely in the interests of the scheme members and act independently from the provider.

The committee must have a minimum of five members and the majority of members, including the chair, must be independent.

The IGC is required to produce an annual report for members, outlining the assessments it has done and any additional work to ensure members are receiving value for money. It must be published and available for free on a publicly accessible website. Please see links at the end of this article for the latest reports available.

The report must include detailed costs and charges information including ongoing charges and transaction costs for each default fund, and sample illustrations showing the effect charges could have on a member’s pension pot over time.

The Committee must also publish its terms of reference, which allow members and employers to clearly see the scope and role of the IGC and its members.

The IGC’s terms of reference and three most recent annual reports must also be made available to members and employers online.

The regulator also requires providers to take any reasonable steps to address concerns raised by their IGC. To that effect providers must explain to the regulator if they decide to depart from any recommendations made by their IGC.

Under FCA regulations, providers must also recruit independent IGC members through an open and transparent process and have a duty to ensure that the IGC members have sufficient expertise and experience.

The IGC has a duty to scrutinize the value for money of all the provider’s workplace pension schemes.

The IGC will assess administration charges, transaction costs, management/investment charges, and investment performance. The Committee must also take a closer look at the default investment strategies and if they are designed, executed and communicated in the best interest of members. It will also assess the quality of service the provider offers including if communications are fit for purpose and if financial transactions are processed promptly and accurately.

As part of the ongoing value for money assessment and the new rule which have come into play, providers must also consider the appropriateness of the scheme arrangements and compare the scheme with a small number of reasonably comparable competing schemes.

The IGC has a duty to speak up for individual members where they have concerns. A member can contact their provider’s IGC should they think they are not getting value for money. If the Committee agrees that value for money is not being provided, it will raise this with the provider.

If the IGC is not happy with a provider’s response to either individual member issues or general recommendations from the Committee, it should escalate its concerns to the FCA as well as members and employers.

The rules on IGCs recently changed. Where previously the rules only required IGCs to provide independent oversight of the value for money of a workplace pension in accumulation, ie before any pension savings are accessed, they will now also look at drawdown.

From 1 February 2021 a new duty was introduced for IGCs that requires them to also oversee the value for money of investment pathway solutions for pension drawdown.

The IGC must now also ensure that costs and charges that are good value relative to the quality of the pathway solution and associated services, and a pathway solution that is appropriate for the pathway objective and the characteristics of the members.

The FCA also introduced a new duty for IGCs to consider and report on their firm’s policies on environmental, social and governance (ESG) issues, member concerns, and stewardship, for the products that IGCs oversee.

The new rules also apply to GAAs.

The FCA said it introduced the changes to protect consumers from investments that may be unsuitable because of ESG risks, make sure that consumer concerns are taken into account, and encourage good stewardship of investments. The rules are just part of a package introduced following the failings identified by the FCA in its Retirement Outcomes Review.

The new ESG, member concerns and stewardship rules were developed following recommendations made by the Law Commission in its Pension Funds and Social Investment report published in June 2017.

The FCA promises that the new additions to the IGC rules, and their impact on schemes and workplace pension providers, will be reviewed a year into their introduction. This leaves us with more potential changes for February 2022.

With the attention on environmental issues as the COP26 conference in Glasgow draws to a close, it looks likely that the focus on environmental and governance issues for workplace pension schemes will continue to grow.

 

latest reports available: