Contract-based schemes: What next for employer-established governance committees?

In this briefing we look at the impact of Independent Governance Committees on voluntary governance committees for contract-based pensions.

14 April 2015

For some time there has a been a ‘governance gap’ between contract-based pension schemes (such as Group Personal Pension Schemes) and more conventional occupational pension schemes which have a ready-made governance structure in the form of a Trustee Board.

Encouraged by the Pension Regulator, many employers voluntarily chose to establish their own governance committees for their contract based scheme - although there was no requirement to do this - to assist in the running and management of the scheme.  But these committees also serve to allow employers more generally to ‘kick the tyres’ of their scheme: employers saw an ever increasing number  of employees joining their contract based scheme following the closure of their DB Defined Benefits Scheme, and governance committees served as a useful check on ensuring that the scheme performed its intended function.

In a separate development, all providers of work place schemes (this will include most but not all contract based schemes) have from 6 April 2015, been required to set up their own Independent Governance Committee or IGC to represent the members of affected contract-based schemes.  With an independent chair and at least one-half of the committee independent of the provider, IGCs will have a statutory duty to act in the interests of members (active and deferred), will be tasked in particular with assessing whether members receive value for money, and will have the ability to raise concerns with the provider, or ultimately, and in extreme cases, the Financial Conduct Authority (FCA).

The creation of IGCs recognises in part that it may not be practical or cost effective for all employers, especially smaller ones, to have their own governance committee.

At first sight, there is a seemingly strong degree of overlap between an employer’s voluntary governance committee and IGCs, so where does the advent of IGCs leave employer’s voluntary committees?  Does this effectively mean that employer’s committees will now be redundant?  The short answer is no.

On a more detailed consideration, both IGCs and employer’s committees are likely to exist simultaneously, but with a possible change in role for the employer-established committees. This is because of the following:

  • IGCs and employer established arrangements will have a different focus – consistent with their statutory duty to act in members’ best interests, the IGC will be examining the member perspective across the provider’s workplace pension schemes as a whole, they will not be focussing on the position for any particular employer. This means that issues affecting members at an individual employer scheme - or the continued suitability of the scheme itself - will still need to be considered at the individual employer level, with the obvious place to do this being via an individual employer’s voluntary governance committee if it has established one.

Interestingly, the FCA’s final rules for IGCs published in February, recognise that it may not be practical or cost effective for the IGC’s to assess the value for money of each employee’s scheme individually, but suggests that IGCs may want to consider grouping schemes with similar characteristics and assess value for money at the levels of groups of similar schemes together.

  • From a relationship perspective, the employer-established committee would typically report to the employer; the IGC’s reporting will be directed at the provider itself.
  • Monitoring the ongoing suitability of an employer’s workplace scheme (including the provider itself, the charging structure and provider communications) does still need to be done at an employer level, even though an IGC might look at similar things.  Again, the obvious place to have this done is through the employer’s voluntary committee.
  • Many (but not all) employer voluntary committees include a channel at the workplace level for member queries and representation.  The wish to continue with this is another reason why it is unlikely employers will disband their voluntary committee arrangements.
  • Default funds remains an area of uncertainty; the Pension Regulator suggests that default funds are typically reviewed at the employer level by an employer established governance committee where there is one and it is not clear how this will impact with the IGC’s work on assessing value for money of a provider’s default fund range; this may be an area where an employer established committee considers reports published by the IGC when considering wider default fund issues at an individual scheme level.

How IGCs and voluntary arrangements will interact remains to be seen.  IGCs are still new and there is no precedent to draw on. There are some similarities, however, with with-profits committees established by insurers in connection with with-profits funds they operate in order to consider the interests of with-profits policy holders.

What can be said is that the arrival of IGCs is unlikely to prompt employers to disband their voluntary arrangements, not least because they will continue to have a valuable role in doing what they were established to do in the first place (ensuring the continued effectiveness of the employer’s contract-based scheme).

What is more likely, however, is that employer’s voluntary arrangements will adapt their role to tie in with that of the IGCs, an obvious change being to review the outputs of the IGCs.

Many employers who have established voluntary governance committees have been careful to set the scope of their committee and manage risk by having tightly drawn terms of reference, which, going forward, employers should now consider reviewing for appropriateness.