Richard Butcher dissects the draft rules for Independence Governance Committees
Donkey’s years ago there was a BT advert where a little old lady calls her son from her rural Scottish croft. They chat but, since the line is crackly, they cut it short.
As she puts the phone down (fire blazing in the hearth, pot of tea, cosy and all, on the table) she says to herself (and of course, us) that she should complain.
Cut to a kaleidoscope of frantically busy BT engineers scaling telephone poles, fiddling with wires, poring over computers, even a satellite circling the world: the implication being they are hard at work in the background improving things.
Sure enough, cut back to the little old lady, sometime later and just ending a now crystal-clear call to her son. As she replaces the receiver (dog jumping down from rug-strewn sofa in background) she says to herself (and us): “There you go, you do nothing and it fixes itself.”
From April 2015 we will have a new team of people working hard in the background of contract-based pension schemes, whose role will be to make sure they “fix themselves all on their own”.
The IGC will be a GPP’s equivalent to a board of trustees
The Financial Conduct Authority (FCA) has mandated that every insurance company with a book of group personal or stakeholder pensions will have to create an Independent Governance Committee (or IGC) or, for smaller insurers, a Governance Advisory Arrangement (in effect an outsourced IGC) from next April. A consultation on how these will work was published early in August 2014.
The consultation proposes that each IGC will be constituted by terms of reference that will have to include certain specified items, the most significant of which will be that their duty of care must primarily be to the relevant active and deferred pension members. In other words, the IGC will be a GPP’s equivalent to a board of trustees.
IGCs will have to comprise at least five members (which can be individuals or corporates) and the majority of them, including the chair, must be independent of the insurer. Each governance committee must possess sufficient collective expertise and experience, and be granted access to whatever information, including confidential information, and resources they reasonably need to ensure that the pension members receive value for money.
They will be required to assess regularly whether the insurer is reviewing the characteristics and net performance of all investment strategies, default and otherwise, to ensure they are aligned with the members’ interests.
The IGC will have the power to escalate their concerns to the FCA and/or go public
In the event that the IGC should conclude that all is not right, they will have direct access to the insurer’s board or an equivalent senior body. They will be empowered to challenge them and to recommend change. In the event that the insurer chooses not to comply, they, the insurer, will have to explain themselves, and the IGC will have the power to escalate their concerns to the Financial Conduct Authority (FCA) and/or go public.
The chair of the IGC will have to report each year to the members to explain how value for money has been delivered by the scheme, how the IGC has complied with the DWP’s quality features, how it has met the requirement to act in the members’ interests, and on the costs incurred for transaction and other activity.
There is no reason why they shouldn’t succeed in helping to deliver better pension outcomes
In due course, the FCA envisages that the IGC will also have a role in monitoring and challenging transaction costs, and they intend to consult more on this requirement during 2015.
The role of the IGC is new, admittedly, and as such is untried and untested. But they represent a step-change in the governance of contract-based schemes and, provided they act robustly but constructively, there is no reason why they shouldn’t succeed in helping to deliver better pension outcomes. Time will tell, of course. Like the phone line fixing itself.