As part one of our investigation into independent governance committees, Louise Farrand looks at whether boards need legal indemnity
Setting up any new regulatory regime is bound to be painful, and agreeing the rules for independent governance committees (IGCs) is no exception.
With so many different areas of regulation being discussed within the world of defined contribution pensions, it can be tempting to switch off from the debate. But IGCs are tasked with representing members of contract-based schemes’ best interests. They will play a vital role: protecting a market of consumers who are, at the moment at least, thoroughly uninterested in pensions.
Effectively, IGCs are future-proofing pensions for a new generation of members, but there is no industry consensus on what the new regulations should look like.
The Financial Conduct Authority (FCA) published its proposals in August and asked the industry to respond. The consultation closed in early October and the final rules are expected to be published in January – a New Year’s treat for the sector.
IN BRIEF: Independent Governance Committees
February 2014: The Office for Fair Trading concluded an independent enquiry into whether members of defined contribution pension schemes are consistently getting value for money. It decided that the answer is no and recommended a range of measures aimed at improving governance. One of those was the introduction of Independent Governance Committees, after discussion with the Department for Work and Pensions and the Association of British Insurers. Providers would be expected to establish Independent Governance Committees in 2014.
August 2014: The Financial Conduct Authority opened a consultation on its proposed rules for Independent Governance Committees. It welcomed responses from providers of workplace pension schemes, consumers, employers, advisers, fund managers and third parties.
October 2014: The Financial Conduct Authority’s consultation closed.
January 2015: The Financial Conduct Authority expects to publish the final rules specifying the dos and don’ts for Independent Governance Committees at the start of 2015.
April 2015: Providers must be operating Independent Governance Committees by April 2015, the Department for Work and Pensions has specified.
The industry has warned that the FCA’s proposals only give IGCs power to look after the best interests of tomorrow’s members of contract-based DC schemes. They leave IGCs powerless to look after the best interests of existing members of such schemes.
The proposed rules do not empower IGCs to move existing members’ savings from old-style, under-performing investments into new, improved default funds without their express consent. Securing that consent, in a world where members often don’t understand what they are invested in, will be an administrative nightmare for contract-based schemes.
“They leave IGCs powerless to look after the best interests of existing members”
“They haven’t really grasped the nettle,” is Paul McBride’s verdict. McBride is director of Legal & General Trustees Limited. He has been pushing the FCA and the Department for Work and Pensions to empower IGCs to act in members’ best interests when they lack the understanding and motivation to act themselves.
“We know that inertia is going to take control here and most people won’t opt out, but you have to be able to act in their interest somehow,” he says. “We need a retrospective term inserted into most contracts. New ones can be written that way. But the problem is we’ve many hundreds of thousands of members who haven’t got that in their contract, and we can’t do anything with them.
“We are looking for a contractual safe harbour – the ability to make those changes within the contract – and a regulatory safe harbour, so that if we act in the member’s best interest, the regulator is not going to come back and haunt us,” says McBride.
“Securing that consent will be an administrative nightmare for contract-based schemes”
Andy Seed, an executive director at J.P. Morgan Asset Management, agrees with McBride.
He says: “The whole point of auto-enrolment is that default funds have to be appropriate for the membership. If they’re not appropriate and you don’t have the power to change it, that’s a bit of a problem.”
Members who later realise that they are invested in a poorer fund than those who joined the scheme later, when IGCs were empowered to act on the latter’s behalf, may in the future go back to schemes such as Legal & General’s and blame them for not acting sooner.
That’s why McBride and others are eager for the IGC proposals to give some form of protection to members of IGC boards.
Opinions about exactly what form that protection should take differ, from McBride’s vision of a contractual safe harbour to others, who moot granting members of IGC boards legal indemnity.
“The whole point of auto-enrolment is that default funds have to be appropriate for the membership”
Legal indemnity is briefly considered and then dismissed in the FCA’s proposals, but it has asked the industry for its views on whether or not it should be granted.
McBride isn’t calling for legal indemnity. “IGCs have no executive power so we’re less concerned about indemnity in the contract environment than the trustee environment. That’s because all you’re doing is making a recommendation: if the provider acts on it, you would expect them to undertake their own due diligence and understand the consequences. I’ve never been absolutely convinced that it would be necessary in that environment.”
However, others believe that independent members of IGCs’ decision-making powers will be compromised without indemnity. Speaking at the National Association of Pension Funds’ annual conference, Debbie Harrison, a visiting professor at the Pensions Institute, said IGC panel members “really do have to have the power to act. I think in particular, they have to have the appetite, which is a different thing again; that they must feel empowered to act, even if there is disagreement.
“I think it’s important that there’s a requirement for indemnity, which concerns me. It’s always been a principle of trusteeship that you speak your mind. There should be some form of protection. I personally wouldn’t want to be on a board that doesn’t have some form of protection for its members.”
“I personally wouldn’t want to be on a board that doesn’t have some form of protection for its members”
Helen Ball, a partner at law firm Sackers, agrees with Harrison. She says that IGC members who work for the provider will probably have some sort of employment insurance protecting them – “providing you’re not acting in a fraudulent or naughty way”.
She continues: “If you haven’t got exactly the same level of protection and cover as someone who works for the provider, but you’re expected to make decisions as a group of people, it could make it difficult if you have tricky decisions that need to be made. You may get independent trustees who are more risk averse, because they may need to call on their own insurance, or worse, not be protected. It could influence the kinds of decisions that they reach, and that may not be in the interests of the members.
“If the idea is that everyone should be treated the same on this committee, then make it a requirement at least for some compulsory insurance… so that they’re all the same.”