Next step towards a level playing field for workplace pensions

Introduction

The FCA has been working with the DWP and TPR to design a package of reform measures, aimed at helping to ensure that all workplace pension schemes are of high quality and offer value for money (VfM).

On 6 August 2014, the FCA published a consultation on proposed rules that will require the providers of contract-based workplace pensions to set up and maintain independent governance committees (IGCs). It puts flesh on the bones of the Government’s plans for personal pension schemes to be governed in a more “trust-like” way and gives a preview of the additional regulation trust based schemes can expect from the DWP later this year. But the meaning of VfM remains elusive; the FCA does not “intend to prescribe in rules” how IGCs should approach assessing this.

In this Alert:

Key points
Background
Who is affected?
IGCs – when they are required and what they will do
Firm’s duty to “comply or explain”
IGCs – what they will look like
Timetable

Key points

Firms operating workplace personal pension schemes will be required to establish and maintain an IGC.
The FCA will set minimum requirements for the format and operation of IGCs, as well as their role within a firm’s governance framework.
The DWP is due to publish regulations to introduce consistent minimum governance standards for occupational pension schemes in autumn 2014.
Firms with smaller and less complex workplace pension arrangements will be allowed to appoint an independent third party (referred to as “a governance advisory arrangement” (GAA)) to take on their IGC responsibilities.

Background

On 27 March 2014, the DWP issued a command pape r (the “Paper”) proposing a range of measures aimed at improving the quality of workplace DC pension schemes (see our Alert for details). The measures were driven by the large numbers of members now joining auto-enrolment schemes and followed earlier consultations on minimum quality standards and pension charges (see our Alert for details) and the OFT market report.

One of the new requirements outlined in the Paper was for workplace pension schemes to establish IGCs to perform a similar role to trustees, to improve accountability and assess value for money.

Who is affected?

The requirement for IGCs is completely new, and every workplace personal pension provider will need to establish one by April 2015 (unless they are one of the smaller players in the market and decide to use a GAA instead).

It is proposed that IGCs will produce a publicly available annual report with information on VfM and how the IGC has complied with its duty to act in members’ interests. The hope is that this will in time lead to much more transparency about how workplace pensions operate, providing helpful information to employers for selecting a scheme and managing the ongoing relationship with the provider.

IGCs – when they are required and what they will do

Requirement

Firms (e.g. insurance companies) operating a workplace pension scheme where there are, or have been, direct payment arrangements in place (where an employer pays contributions directly to a firm for the benefit of employees) to cover two or more employees of the same employer will be required to establish and maintain an IGC.

The proposals exclude individual personal pension schemes from mandatory IGC coverage, but firms may still choose to include such schemes.

The requirement to have an IGC will be in addition to existing FCA principles and rules, such as the requirement to treat customers fairly, and will not replace these.

Scope

IGCs will have a duty to act in the interests of both active and deferred members.

Terms of reference

The FCA will require the firm’s terms of reference to contain certain key points, including the following core duties:

to act in the interests of members
to assess the VfM of the firm’s workplace pension schemes (i.e. weigh the quality of the scheme against its costs to members) – firms will be required to provide the information and resources necessary for the IGC to do this
where the IGC is not satisfied with VfM, to raise concerns (as it sees fit) with the firm’s board
if the IGC is not satisfied with the response, it will be able to escalate concerns to the FCA, alert relevant scheme members and employers, and make its concerns public
to produce an annual report of its findings.

The terms of reference will also require that, as a minimum, the IGC assess whether:

default investment strategies are designed in members’ interests, with a clear statement of aims, objectives and structure appropriate for scheme members
the characteristics and net performance of all investment strategies are regularly reviewed by the firm to ensure they align with members’ interests, and any necessary changes made
core scheme financial transactions are processed promptly and accurately.

We can assume that the DWP’s proposed minimum standards for trust based schemes will be along the same lines.

Firm’s duty to “comply or explain”

The FRC proposes a “comply or explain” approach to concerns raised by the IGC. This would require firms to take reasonable steps to address any concerns raised by the IGC or to explain to the IGC, in writing, why they do not intend to do so.

IGCs – what they will look like

Composition

IGCs will be required to have sufficient expertise and experience to assess VfM. They will also need to be independent of the firm, so that they can act solely in the interests of scheme members in raising any concerns.

It seems likely that IGCs will be required to have at least five members (although the FCA is consulting on whether this number could be too small), the majority of which (including the chair) must be independent of the firm. The FCA is considering quite a tight definition of “independence”, but proposes leaving sufficient flexibility to allow firms to include the trustees of their master trust on the IGC.

IGCs will not initially need to include “approved persons“, but the FCA is reserving its right to revisit this if it considers IGC members, and in particular IGC chairs, are not suitably qualified or are not performing their duties correctly.

Appointment

The appointment process must be open and transparent; FCA guidance will suggest that firms use an external consultancy or open advertising.

Although the FCA does not propose that scheme members should elect any or all of their IGC, it seems likely firms will be required to facilitate member dialogue directly with IGCs.

Timetable

The consultation closes on 10 October 2014.

The FRC intends to publish the IGC rules in a policy statement in January 2015. The rules are expected to come into force in April 2015. Firms will be expected to comply immediately, and so need to start taking steps to design their IGCs now.