Independent governance committees – what lies ahead for 2017?

IGC reports for 2017 are likely to report on:

• Improved value for money for members in legacy schemes
• Member input to ensure IGCs’ approach to value for money is relevant
• Detailed analysis of direct and indirect pension costs, such as transaction fees

The role of IGCs is to protect members’ interests by challenging providers where they find that schemes offer poor value for money.  

Inaugural IGC annual reports were issued by April 2016 and are publicly available on each provider’s website. The reports vary considerably, due in part to the different approaches taken to measuring and assessing value for money, which were not prescribed definitively in regulation.  

At this early stage in the life of IGCs, assessing value for money is considered a work in progress, to be refined in year two and beyond through further research and analysis in key areas.

Legacy schemes – implementation plan updates

The priority of many IGCs was to review data on legacy schemes where there was high risk of poor value for money. This involved older, often neglected schemes, which also often had a high level of deferred members, exacerbated in some instances by low employer engagement.

Having identified such schemes, IGCs and providers have agreed implementation plans, and in 2017 annual reports are expected to provide updates on progress. Improvements to legacy schemes involve not only reduced fees and charges: IGCs are encouraging providers to simplify and modernise schemes so members have better access and control.

Progress is constrained by limits on the ability to implement changes, such as bulk transfers in contract-based schemes, where IGCs do not have the same powers as trustees.  

Value for money – input from members

The regulator’s terms of reference list some factors IGCs must include in their value-for-money assessment, while leaving IGCs’ scope to include other relevant factors. The regulations also require that members’ views are considered.

In the coming year, many IGCs are proactively embarking on member and employer research, both alone and in syndicates, to ensure members’ interests are evidence-based and accurately reflected in their work. This research will also help IGCs, when writing future annual reports, to cater for members’ priorities and understanding.  

Costs and charges – need for standardisation

Identifying the impact of costs and charges is an essential part of any value-for-money assessment. In 2016, IGCs voiced their frustration at the complexity and variation of charging structures, a result of many historical arrangements and anomalies.

The lack of standardised transaction cost reporting from asset managers means a valid comparison of net investment returns and benefits is currently difficult. This is another work in progress for IGCs.

The current FCA consultation on this issue may lead, in time, to more meaningful industry benchmarks on member-borne charges. IGCs and providers will also need to consider the implications of proposed regulations on exit fees, depending on their timing.

Default fund suitability

Given that most pension scheme members are invested in default investment funds, IGCs have focused particularly on the need for regular review of their suitability.

Since the introduction of the pension freedoms in 2015, DC default strategies have needed to cater to a broader set of member choices in retirement.  

Many default strategies were set years ago and need to be refreshed in today’s context of low interest rates and low nominal returns. Expect IGCs to report back in 2017 on how providers are considering and implementing these changes, which in turn may lead to the involvement of employers in change communications and notifications.

IGCs beyond 2017

Once the 2017 round of annual reports has completed, the FCA has scheduled a review of the effectiveness of IGCs in improving value for money in DC contract-based workplace pensions, including their scope and powers.

At this stage, IGCs are still in their infancy. How they operate and are regulated will likely continue to evolve, as we learn as we go.  

Dianne Day is client director at Independent Trustee Services