Final rules for independent governance committees

Introduction

On 4 February 2015, the FCA confirmed the final rules requiring firms that operate workplace personal pension schemes to set up and maintain independent governance committees (IGCs).

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
• Next steps

Key points

• With effect from 6 April 2015, firms that operate workplace personal pension schemes (including group SIPPs established under trust) will be required to establish and maintain an IGC, comprising at least five members, with a clear duty to act independently of the firm.
• 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.
• The FCA rules outline the minimum standard for IGCs, terms of reference, the scope of the IGC and what type of firms will need to set one up.
• IGCs will be responsible for assessing and raising concerns about value for money (VfM) on behalf of scheme members.
• The FCA has worked closely with the DWP and TPR with the aim of ensuring that the rules for IGCs and the new minimum governance standards for occupational DC schemes (see our Alert) are aligned, where appropriate.

Background

The FCA has been working with the DWP and TPR to design a package of reform measures, aimed at improving the value of workplace pensions.

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 IGCs (see our Alert for details).  IGCs are intended to provide governance oversight of workplace personal pension schemes.

Who is affected?

Firms (eg insurance companies) operating a workplace personal 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.

Individual personal pension schemes will be excluded from mandatory IGC coverage, but firms may still choose to include such schemes.

IGCs – when they are required and what they will do

The requirement to have an IGC will sit alongside existing FCA principles and rules, such as the requirement to treat customers fairly.

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.  This is intended to provide transparency about how workplace pensions operate, providing helpful information to employers for selecting a scheme and managing the ongoing relationship with the provider.

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 VfM on an ongoing basis. Broadly, this entails weighing up the quality of the scheme, ie the benefits and services it provides, against what it costs scheme members
• 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 should escalate concerns (as appropriate)
• 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 and executed in members’ interests, with a clear statement of aims and objectives
• 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.

Firm’s duty to “comply or explain”

Firms will be required 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 collective 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.

IGCs will be required to have at least five members, the majority of whom (including the chair) must be independent of the firm.  The FCA will provide guidance on the definition of “independent”.  Under the guidance, any person who is, or was in the last three years, paid by the provider for any other role will not meet the definition.  However, it will ultimately be for the provider to determine whether a member is truly independent and the FCA acknowledges that a different approach to the one it will advocate could be taken if it can be justified.

IGCs will not need to include “approved persons“, but the FCA is reserving its right to revisit this if it considers IGC members 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 search agency or open advertising.

Due to the risk that an IGC member will subsequently take on other responsibilities with the provider which compromise their independence, the guidance will suggest that firms regularly review the independence of their IGC members and take appropriate action.

An IGC member may be appointed for a fixed term of up to five years, with a cumulative maximum term of ten years, unless the member is a corporate person.  Corporate appointments will not be subject to limits.  Where a corporate person is appointed, the FCA will expect a named individual to be nominated to take up the position.

Next steps

The FCA expects providers to have established an IGC or GAA by the 6 April 2015 deadline; many have done so already.

A forum for IGC chairs will be held around the time the rules become effective.  At this forum, the FCA intends to clarify its expectations of IGCs and GAAs, identify relevant contact points and outline the process for escalating issues.  It will also begin discussions about how best to support IGCs in their VfM assessments and to consider whether further guidance would be helpful.

A review into the effectiveness of IGCs is scheduled to take place in 2017.