Governing bodies have a duty to fulfil in providing oversight. What does that mean for workplace pensions?
For workplace pensions, the bodies tasked with this oversight are the Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs). With the FCA's eyes on assessing value for money (VFM), these bodies should scrutinise the VFM provided by workplace pensions schemes.
Whilst GAAs are more appropriate for smaller and less complex products, oversight and appropriate governance arrangements are still crucial.
There is a clear duty to act in the best interests of scheme members, including challenging the VFM of pension schemes.
The IGCs and GAAs need to be appropriately structured and resourced. Good corporate governance should also include processes and frameworks that enable oversight including timely management information. For example, consideration of what information is required to enable a good understanding of fees charged.
FCA’s thematic review from 2020 identified that governing bodies had a positive impact upon member outcomes. It also identified some areas of concern:
Level of challenge provided to firms
Independence of the governing bodies
Ability to obtain information about transaction costs
Wide variation in how governing bodies operated resulted in wide-ranging outcomes for members of different schemes
When different VFM approaches are adopted, the VFM will differ between schemes and potentially result in poor outcomes
Governing bodies must demonstrate independence from the firms. Whilst GAAs are likely to be third parties and offer greater independence, evidence suggests that they are less effective in delivering VFM.
Some governing bodies have detailed frameworks and considered the needs of different members such as charges and investment strategies. Other governing bodies consider members collectively leading to poor outcomes for some members.
Where VFM concerns are identified governing bodies may have difficulty in getting firms to prioritise and take action in a timely manner as well as failing to escalate concerns to their governing bodies.
Effective governance requires the governing bodies to receive information in good time to complete analysis and enable decision making. The governing bodies may lack the right information to enable their analysis. This may be due to matters beyond a firm’s control. For example, the FCA introduced rules in 2018 requiring asset managers to provide information on transaction costs. This addressed a gap where relevant information was not provided to governing bodies.
In summary, good governance means having the following in place:
Right structure with appropriate resources to enable independence
Appropriate processes to facilitate a clear framework
Appropriate membership encouraging independence from the firm and acting in the interests of the policyholders
FCA’s rules in COBS 19.5.5R outline the terms of reference for an IGC and include details of the framework for the VFM assessment. The governing bodies should bear in mind:
The impact of fixed costs on small pension pots
Investment needs of different members (eg those members approaching retirement)
Vulnerable members’ needs
The VFM assessment includes analysis of:
Costs borne by members
Costs incurred in managing and investing funds
Suitability of default funds for members
VFM assessment should enable clear improvements, perhaps leading to cost reductions or better administration or more appropriate funds.
The FCA is clear that where an IGC is not satisfied with a firm’s response to its challenges, the IGC should escalate its concerns to the firm’s governing body. If this does not result in a satisfactory outcome, the IGC can make its concerns public or escalate the matter to the FCA, if the IGC thinks it would be appropriate.
Steps for success:
IGCs and GAAs should review their composition and consider the levels of expertise, skills and experience of their membership. This should be an annual review to identify any emerging weaknesses and enable early engagement of external expertise when required.
The governing bodies should then review what information they require and where that information resides. Data may be required from multiple sources.
How do they access that information to enable informed decision-making and demonstrate oversight?
How Ruleguard can help you:
Ruleguard is an industry-leading software platform designed to help regulated firms manage the burden of evidencing and monitoring compliance. It has a range of tools to help firms fulfil their obligations across the UK, Europe and APAC regions.
Ruleguard can help firms to collate third party information in one secure environment and facilitate management information and provide reassurance to the Board. Get in touch with the Ruleguard team to learn more.
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Head of Client Regulation| Ruleguard