Independent Governance Committees

Our rules require firms that operate workplace personal pension schemes to establish and maintain Independent Governance Committees (IGCs).

IGCs have a duty to scrutinise the value for money of the provider’s workplace personal pension schemes, taking into account transaction costs, raising concerns and making recommendations to the provider’s board as appropriate. IGCs must:

• act solely in the interests of relevant scheme members
• act independently of the provider

An IGC has a minimum of five members, the majority of whom must be independent, including an independent chair.

Why we introduced IGCs

The UK has an ageing society with many people not saving enough for their retirement.  In 2013, the Office of Fair Trading conducted a market study of workplace pension schemes. The study revealed competition problems in the market, including a very weak buyer side and the potential for conflicts of interest. It covered both trust and contract-based schemes, since employers can choose either type of scheme for their employees.

Automatic enrolment means that it is even more important to ensure that workplace pension schemes deliver value for money. Most employee pension savers are enrolled into the default fund of their employer’s pension scheme. Many of these people will not have made any active choice about how their pension savings are invested and may be on low incomes.

Our rules[1] requiring IGCs came into force in April 2015. IGCs have a role similar to trustee boards and are a key part of a range of protections we introduced to ensure that workplace personal pension schemes deliver value for money for members. Other protections include the charge cap on default funds and bans on certain types of charging practice.

We work closely with the Department of Work and Pensions[2] (DWP) and The Pensions Regulator[3] on pension issues. The DWP introduced related measures to improve the value for money of trust based workplace pension schemes.

What IGCs must do

Our rules[4] give IGCs clear duties and strong powers to challenge providers on value for money issues.

These rules require that an IGC must:

• assess the ongoing value for money of workplace personal pension schemes
• act solely in the interests of relevant scheme members
• raise any concerns with the provider’s board
• escalate their concerns to us, if necessary
• report annually on what they have done

IGCs have a duty to focus in particular on the default funds of the schemes operated by their provider.

What providers must do

Providers of workplace personal pension schemes must establish and maintain an effective and independent IGC. Providers must support IGC members with the information and resources that they need to fulfil their duties.

Our rules require that the provider must:

• recruit independent IGC members through an open and transparent process
• ensure that the IGC has sufficient collective expertise and experience
• ensure that member views can be directly represented to the IGC
• provide the IGC with the information and resources it needs
• take reasonable steps to address any concerns raised by the IGC
• explain in writing why the provider has decided to depart in any material way from any advice or recommendations made by the IGC.

GAAs as an alternative

Our rules allow providers operating smaller and less complex schemes to establish a Governance Advisory Arrangement (GAA) with a third party, as an alternative to an IGC. While a GAA may cost less to operate, the desired outcome remains the same, which is to ensure that relevant schemes deliver value for money for members.

Proposed extension of IGCs’ remit

We are consulting[5] on changes to our rules and guidance to extend the remit of IGCs in two areas:

• a new duty for IGCs to report on their firm’s policies on environmental, social and governance (ESG) issues, member concerns and stewardship, for the products that IGCs oversee
• a new duty for IGCs to oversee the value for money of investment pathway solutions for pension drawdown

We propose related guidance for providers of pension products and investment-based life insurance products. This proposed guidance sets out how these firms should have regard to factors that can have an impact on financial returns, such as ESG risks and opportunities, and to non-financial consumer concerns, when making investment decisions on behalf of consumers.

In this consultation, we also discuss what we have seen in published IGC annual reports and from our engagement with IGCs.  We invite views on issues relevant to our work with the Pensions Regulator (TPR) on value for money in pensions.

This consultation closes on 15 July 2019.  We will consider the responses we receive and any other relevant developments before finalising our rules in Q4 2019.

Review of IGCs’ effectiveness

In our 2019/20 Business Plan we said that we will carry out a review of IGCs’ effectiveness in 2019/20.