Pensions – Independent Governance Committees
As someone who is used to dealing with corporate governance issues for companies, I thought it would be reasonably straightforward to transition that skill to advising, not just companies, but also pension trustees, and providers on the new governance arrangements for Defined Contribution (DC) workplace pension schemes. Surely the principles of governance are the same regardless of the subject matter? How different could the new DC governance regime be from other governance requirements such as the UK Combined Code or the PRA/FCA remuneration code?
Answer: very different.
The idea of transitioning seamlessly to advising on DC governance issues is not as left-field as it might seem. All governance regimes require an effective governance structure to be established from which there is normally a separation of the governance framework from the delivery function with clear lines of responsibility, accountability and management. The decision-making process should be explicit and effective and there should be clarity of duty for all delegated bodies and people.
So far so good. However to quote George W Bush, I completely “misunderestimated” just how multi-layered DC governance had become. Not only does one need to understand the different types of DC workplace pension schemes, the way in which they work and the features they offer (especially in light of the new pension freedom rules) but that it is also vital to recognise the role that trustees, employers, providers and master trusts play in how those schemes function day to day. Throw in a sprinkling of value for money, member outcomes, and quality standards; add a dollop of internal controls and risk management; top it all off with administration and member communication and what you end up with is a complex mix of issues to be constantly made aware of and monitored. Keeping on top of all that is, quite frankly, exhausting!
Let us take the example of Independent Governance Committees (IGCs). The establishment of IGCs by providers of contract-based pension schemes was recommended after an Office of Fair Trading market study found problems with the workplace pension market including potential conflicts of interest between employers and schemes. Providers of contract-based DC schemes are required by the FCA (as of 6 April 2015) to set up an IGC, with a clear mandate to act independently of the firm.
The role of an IGC within the governance structure of a contract-based DC scheme is therefore to monitor, and report on, whether the members of those schemes are receiving value for money. In this regard, its main areas of focus are on default investment strategy, fund performance and core financial transactions. A related purpose is to challenge the provider – hence the need to be “independent”.
An IGC needs to be proactive and potentially escalate any concerns about the provider to the FCA.
There are conditions for maintaining and establishing an IGC as well as minimum requirements for their terms of reference and IGCs must produce an annual report and require providers to make those reports publicly available. The report is the responsibility of the IGC Chair (again another new thing) and the FCA expects IGCs to produce these reports on or before 5 April 2016, even where there is a partial year report.
Phew! That is a lot of governance for providers and their advisers to get to grips with.
And if that was not enough, once the IGC is up and running, it should then identify those priority areas that could cause concern. High up on the list at the moment will be the challenges coming out of the audit of legacy workplace pension schemes as prompted by the Association of British Insurers.
Many difficult questions remain about how IGCs will work in practice, including exactly how they will be appointed, resourced and supported. Neither is it clear whether committee members of IGCs will be under explicit legal duties to act in the best interests of scheme members.
Regardless of how IGCs operate in practice the fact remains that the governance IGCs are just one aspect of the DC governance regime that we are all having to get to grips with. Thankfully, I don’t think I am alone.
Nigel is a member of the recently formed PREP team. PREP is Brodies’ answer to helping pension providers, employers, trustees and individuals, recognise, understand and deal with the challenges and opportunities arising out of the seismic changes that are occurring almost daily in the UK pension market. Auto-enrolment, pension freedoms, DC governance, pension taxation, FCA regulation and liability management, are constant and complicated themes that require or will require, clear, correct and concise, advice and guidance. PREP has been formed for exactly that purpose.