Are IGCs up to challenge of new duties?

So-called independent governance committees have a duty to keep tabs on charges levied on members of contract-based schemes, and hold the plan provider to account if members are not being treated properly.

Changes will see the remit of IGCs extended so that they will have specific oversight of how pension investments consider environmental, social and governance issues.

The FCA has loaded IGCs with these extra duties without being absolutely certain they are all doing a good enough job with the responsibilities they already have

Additionally, IGCs will also examine the value for money on offer in new investment pathways, which providers are required to design to help drawdown investors use their savings safely.

These measures will be welcomed by savers who want a more climate-friendly focus for their retirement savings, and to ensure that drawdown investors are not ripped off. However, it is far from clear whether IGCs will be able to drive real change on these issues.

IGC robustness questions linger

The FCA has loaded IGCs with these extra duties without being absolutely certain they are all doing a good enough job with the responsibilities they already have.

The expanded remit for IGCs comes into effect in April 2020 – the same time that a review of the effectiveness of these committees by the FCA is due to conclude. We will not know the outcome of this review until a few months later.

In my experience, some IGCs are not performing well enough with the responsibilities they already have. The FCA should have focused on sorting fundamental problems with the structure – and makeup – of these committees before trusting them with further duties. 

My views have been formed through my own experiences with IGCs, both as a journalist and as a member of my workplace pension governance committee, where I have been largely disappointed with the IGCs I have encountered.

Woodford fiasco highlights IGC weakness

One case in point last year was the Hargreaves Lansdown IGC, which endorsed its provider’s best-buy list – the same list that notoriously promoted Neil Woodford’s flagship fund.

Thousands of members of this IGC had their funds trapped in the Woodford Equity Income strategy after it was frozen by the FCA.

The chair of the Hargreaves Lansdown IGC, David Grimes, later conceded that his committee did not spend enough time reviewing the selection process used to choose investments on the Wealth 50 list of Hargreaves Lansdown’s favoured funds. Pity the poor members who had their money trapped. To date, we do not know if this committee was held to account for its failures.

A 2018 report published by ShareAction, ‘Who watches the watchers?’, found that while some IGCs had impacted on their sponsoring provider, others have been largely ineffective.

My own direct experiences with IGCs, wearing my other hat as a workplace pension representative, have left me unimpressed with how some IGCs were holding providers to account on my behalf.

Committees compare unfavourably with trust-based system

A fundamental problem is that these committees are not truly independent as they are hired, and can be fired, by the pension provider. Independence is at the heart of whether a body can truly represent the savers’ voice without fear or favour.

The IGCs also do not have a fiduciary – or legal – duty to act in the best interests of scheme savers, unlike trustees.  

These factors, combined with the fact that their duties on value for money have not been tightly defined, have meant that the effectiveness of IGCs has been questionable, and varied.

Some committees also suffer from a problem of being loaded with board members who, while greatly experienced and well-intentioned, are less enthusiastic about challenging providers on savers’ behalf.  

Climate change and value for money in drawdown are growing areas of customer and regulator focus, and the input of effective IGCs is vital to ensure the industry delivers what customers expect.  

But extending the remit of IGCs, and stretching them, at a time when they are already overloaded, or not providing an effective challenge to providers in other areas, risks watering down protections for members. 

Extra responsibilities could be perceived as adding another layer of bureaucracy that will paralyse committees, as they try to consolidate the views of hundreds of thousands, if not millions, of members.

These committees have the potential to be a force for good. But a more deeper – and fundamental – shake-up of the structure of IGCs is needed to really improve outcomes for millions of unengaged pension savers.

Josephine Cumbo is pensions correspondent for the Financial Times