The new rules coming into force for independent governance committees – taking oversight of the provider’s policy on environmental, social and governance factors, and guaranteeing the value for money of new investment pathway solutions – have been branded a “huge challenge” by industry experts.
According to these professionals, IGC’s will have a very short timeline to implement these changes, while taking into account a multitude of different member views in such broad topics as climate change or retirement options.
The Financial Conduct Authority published on Tuesday its final rules to extend the independent oversight of workplace pensions, which determined that IGCs will have to consider and report on a company's ESG policies.
They must also consider the concerns of pension members when it comes to where their money is invested, and how the company approaches stewardship of the investments.
These new rules add an extra layer of bureaucracy to firms’ governance processes, with little benefit to customers
Yvonne Braun, Association of British Insurers
As part of its latest work on retirement, the FCA proposed that pension companies offer their non-advised customers a choice of investment pathways to meet their retirement objectives.
IGCs will also be in charge of overseeing whether these "investment pathways solutions" – coming into force in August 2020 – offer value for money.
IGC’s will have to determine if costs and charges are good value relative to the quality of the pathway solution and associated services, and if solutions offered are appropriate for the pathway objective, and the characteristics of the consumers likely to be using it, the FCA stated.
These final rules come into force on April 6 2020, which means IGC reports issued in early 2021 will make reference to these two issues.
More bureaucracy in challenging timeline
Yvonne Braun, director of policy, long-term savings and protection at the Association of British Insurers, argued that good governance is critical for companies’ ESG policies and implementation of investment pathways. However, she does not consider that “extending IGCs’ remit is an effective way to achieve this”.
She said: “These new rules add an extra layer of bureaucracy to firms’ governance processes, with little benefit to customers. Firms will now have a dual reporting structure without changing accountability.”
Steven Cameron, pensions director at Aegon, noted that with investment pathways going live in August 2020, “it was important that the FCA clarified the role of IGCs without further delay”.
He said: “Requiring IGCs to effectively endorse the value of the pathways ahead of launch is a new role for IGCs and comes close to an ‘executive’ role. Timescales are also tight.”
Ms Braun also noted that companies have already begun developing pathway solutions for their launch in the summer, “so the expectation that firms will have to have IGCs in place to assess the proposed design of the pathway by April will be challenging”.
The FCA defended the imposed timeline, despite several respondents to its consultation pointing out that it would be challenging for businesses, especially those that do not have an IGC in place.
The regulator stated that the current in-force date allows enough time for IGCs to be involved in the design of pathway solutions before they are offered to consumers.
IGC’s to take into account multitude of opinions
Mr Cameron noted that IGCs are established in challenging providers on value for money for workplace pensions, but investment pathways are a brand new concept, designed to provide those who go into drawdown without seeking advice a broadly appropriate investment strategy.
He said: “A wide range of individuals with different attitudes to investment risk may opt for each of the four pathways, so the specific investment strategy can only ever represent a broad fit and can’t mirror individual attitude to investment risk.
“IGCs will need to build this into their value for money assessment.”
Nathan Long, senior analyst at Hargreaves Lansdown, argued that “assessing value for money, when retirement is so incredibly personal, will be a huge challenge”.
Overall, he said the FCA gave “a ringing endorsement” to IGCs by extending their remit to watch over pension schemes.
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He said: “Specific oversight of how pension investments consider ESG issues in the sustainability of investments should lead to a renewed focus on using pensions to invest for good.
“Initially this extra oversight will see some tinkering to the investments people are enrolled into automatically – they’ll probably look slightly more climate-aware in the coming years than they do today.”
Mr Long noted that over time, people will be given much more personal choice of where their money is invested, with more options that better reflect their personal values being included in company pensions.
“A big challenge for the IGCs will be how on earth they can take into consideration the views of members, which are likely to be wide-ranging.”
