The role of the employer in pension scheme governance

11 August 2014

We are grateful to Plansponsor for the following report:

As auto enrolment has changed the landscape of UK pension provision beyond recognition, a familiar refrain has repeated itself from certain quarters – the call for one regulator to rule them all.

It doesn’t look as though this will be coming anytime soon, so in the meantime we are left with two watchdogs managing the two different types of pensions that dominate DC pensions, with the Pensions Regulator overseeing trustee run arrangements and the Financial Conduct Authority (FCA) responsible for contract based schemes.

And the spotlight has fallen on contract-based schemes, where insurance firms manage the plans on behalf of employers, and how they can improve standards. The solution, put forward by the FCA, has been to call for independent governance committees (IGCs) and this week the watchdog launched a consultation on what these should look like.

So what exactly has the FCA proposed? What do providers make of the proposals? Could this prove an unnecessary burden on providers? And who will step into the breach if these types of arrangements prove unworkable?

The FCA’s IGCproposals are that the bodies must:

• act in the interests of relevant policyholders
• assess the value for money of the firm’s workplace personal pension schemes
• where the IGC finds problems with value for money, to raise concerns (as it sees fit) with
the firm’s board
• escalate concerns to the FCA, alert relevant scheme members and employers, and make
its concerns public, and
• to produce an annual report of its findings.

But the FCA also recommends firms with “smaller and less complex” DC schemes be allowed to establish a Governance Advisory Arrangement (GAA) run by an independent third party.

So that’s what the FCA had to say but what do providers make of the proposals?

A spokesperson for Aviva said: "In the era of automatic enrolment it is essential that customers have confidence in our industry's products and services. We therefore welcome the additional oversight to be provided by the new independent governance committees."

But according to Andrew Power, financial services consulting partner at Deloitte, striking a balance between providing necessary oversight and unnecessary intervention will be crucial.

He says: “The FCA’s proposals will strengthen the governance of workplace personal pension schemes by clearly tasking IGCs to act in the interests of policyholders. The proposed new requirements for IGCs are particularly important in light of automatic enrolment, where employees become contributing personal pension policyholders without having actively chosen to do so. In order to fulfil their responsibilities it will be vital for IGCs to have access to high quality, consistent, understandable management information without imposing an unnecessary burden on pension providers.”

But what of the proposal for GAAs? Are they needed? Who will step into the breach to act as this independent third party?

Richard Butcher, chief executive of PTL Trustees, says: “If put into force as proposed they should significantly improve the outcome members achieve from their workplace personal pension plans. In our dialogue with FCA, amongst a number of ideas, we also proposed the idea of creating a standalone “outsourced” IGC function for smaller insurers. We are extremely pleased this idea has been adopted, now to be known as Governance Advisory Arrangements (or GAAs)."

So whether or not we arrive at a day where there’s one regulator to rule them all it appears greater regulation of contract based schemes through independent governance committees and GAAs is inevitable.