The Financial Conduct Authority has confirmed consumer campaigners’ fears that independent governance committees are not always independent, nor always good at governing value for money. Yet the regulator is sparing providers’ blushes and even rewarding failing committees with new responsibilities, writes FT pensions correspondent and Pensions Expert columnist Josephine Cumbo.
I was prompted to ask the question by news that the Financial Conduct Authority was to hand more responsibilities to IGCs, without being absolutely sure they were doing a good enough job with the duties they already had.
IGCs were introduced in 2015 and had the primary role of making sure millions of savers in contract-based pension plans were getting value for money from the scheme chosen by their employer. To do this effectively, they had to act solely in the interests of scheme members, and whistleblow to the regulator if any concerns raised with the plan provider were not sufficiently addressed.
Savers cannot find out how well, or poorly, their IGCs performed in protecting their interests because the names of companies surveyed by the FCA are being kept secret
These responsibilities were very important, as most savers are not highly engaged with their pensions and are at risk of being ripped off by high charges or enduring poor management.
Now the regulator has proposed expanding the role of IGCs to scrutinise providers’ environmental, social and governance policies and new drawdown investment pathways.
I had deep reservations about this from the outset. Many consumer campaigners were also doubtful about the consumer protection these bodies could offer, given they were not truly independent — IGCs are appointed and remunerated by providers — and were not working to a hard-and-fast definition of value for money.
Fears borne out by study
This scepticism was validated last month when the FCA published a wide-ranging review of IGCs.
The 24-page report made for shocking reading, and should have been the trigger for deeper reform of IGCs. But, once again, the regulator’s response has been disappointing for savers.
For its review, the FCA looked at 14 IGCs, which, when combined, look after the interests of millions of workplace pension savers. While there were examples of some IGCs taking their duties seriously, these were overshadowed by jaw-dropping examples of poor practice.
Among the cases highlighted were examples of IGCs holding meetings without a majority of independent members in attendance, in breach of FCA rules. This had the potential to lead to decisions being made that were inappropriate and weighted towards the interests of shareholders, rather than policyholders.
In other examples, some IGCs appeared to raise little to no challenge to firms, even though the IGC had concerns about value for money.
Some IGCs simply accepted the company’s reasons for not making changes or being unable to do so more quickly, without showing they had challenged or checked whether the firm’s response was reasonable.
One IGC, unnamed in the report, raised specific concerns about high charges. The provider explained these were due to the costs of advice to the employer being passed on through higher charges on members’ funds. There was no evidence that the IGC challenged this, or carried out any analysis, to see whether this was reasonable, even though charges were much higher than other similar workplace personal pension schemes.
Committees do not stand up to providers
When it came to acting on whistleblowing duties, the FCA said a “small” number of IGCs had provided a strong challenge to companies, but some were reluctant to take things further.
In one case highlighted in the report, one IGC was unable to assess whether the scheme’s investment strategies were appropriate for members as the firm had not provided the information the IGC required.
The IGC reminded the company of their request many more times over an extended time period, but this was not referred to more senior managers or escalated to the firm’s governing body. In some cases, IGCs that tried to do the right thing were hamstrung by a lack of resources supplied by the provider.
A catalogue of failings of this nature should, at the minimum, have led to heads rolling at IGCs or providers where clear breaches were identified. This should have been backed by enforcement action. Instead, the FCA has opted to write to providers and IGCs with “detailed feedback” on how they can improve.
Savers cannot find out how well, or poorly, their IGCs performed in protecting their interests because the names of companies surveyed by the FCA are being kept secret.
This is an unsatisfactory state of affairs for millions of savers in contract-based schemes, who get weaker consumer protections than other savers in trust-based pension arrangements.
In the UK, only trust-based pension providers are legally obliged to put members’ interests first. If regulators are serious about improving retirement outcomes for members in contract-based plans, strengthening the requirement on IGCs to put their members’ first should be an urgent priority.
Josephine Cumbo is pensions correspondent for the Financial Times
