When Group Personal Pensions (GPPs) first became popular in the early 1990s, one of their chief selling points was that they needed little or no governance from an employer, the governance was applied centrally by the provider who operated as the fiduciary to all the personal pensions the provider offered.
The original idea was that the group was simply an umbrella and that all the personal pensions were identical in terms of price and investment options. But as time went by, each company sponsoring a group of personal pensions , wanted the umbrella to be unique to it with its own branding, its unique fund range and default fund and with its own charging structure. The GPP moved from being an umbrella of convenience to being something that looked like an occupational pension scheme without the trustees.
The more the company tried to “own” the GPP, the greater the risk that should something go wrong, it would be the company not the provider who got the rap. This subtle risk transfer back to the sponsoring company created a need for this reversionary risk to be managed. This was the reason companies felt they might need a governance committee for their GPP.
To work out if your company needs a Governance Committee, you might try three simple tests
- What impacts the success or failure of the GPP?
- Can a Governance Committee exercise control over these factors?
- Can the governance remain effective over time
Question one has been well answered by the Pension Regulator which published a great paper in January 2011; you can read the paper here . The paper identifies six factors that impact on member outcomes. These are
• Appropriate contribution decisions
• Appropriate investment decisions
• Efficient and effective administration
• Protection of assets
• Value for money
• Appropriate decumulation decisions
Can we exercise control over these factors?
Words such as “appropriate” and “suitable” are subjective and to have meaning, need to be set in context, what is appropriate for one workforce may not be for another. To commit to monitor and manage against these factors requires a knowledge of the workforce’s savings capacity and investment sophistication , of administration standards , market fees, and of the security protocols that make pensions “safe”. It also requires an understanding of what can be done to help staff take good decisions when they retire.
In order for a governance committee to be worth running, there must be a belief among those who establish and manage it, that they can establish “good” from “bad” and implement good when needs be. In our experience, the answer to this question is often “no”, many companies do not establish governance committees because they do not have the capacity to influence outcomes and “do not see the point”.
Can this influence be sustained over time?
Any terms of reference for a Governance Committee should focus on these six factors and should have a clear idea of “what good looks like”. It is the job of an external consultant to provide a benchmark for “good”. The benchmarks will change over time. Ten years ago we believed that a good personal pension had a charge no more than 1% p.a. – this was the “stakeholder cap”. I a recent DWP paper , the Government stated that 0.5%pa was the new “baseline level” for a pension charge.
Unless a company is prepared to continually review its plan with reference to best practice in each of the six factors, the Governance Committee is unlikely to be effective. Many Governance Committees which are set up, start out with good intentions but cannot sustain their objectives.
Governance Committee’s need clear terms of reference concentrating on matters that impact on good DC outcomes. They need to focus on these things to the exclusion of others
Governance Committees need to be operated by a group of people capable of exerting control to achieve these outcomes – ineffective governance is a waste of time.
Finally governance needs to be sustained over time. A derelict governance process can cause more harm than not having a governance process in the first place.
Unless a company is clear about its term of reference, prepared to properly resource its Governance Committee and prepared to sustain its governance over time, it should not run one and instead ensure that staff know they are contracting with their provider and not the company.
There is no legal obligation for a Governance Committee and the company’s decision to establish and run one should be based on a proper analysis of the risks to be managed and the value of governance on the long-term welfare of its staff.
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- New govt pension scheme could be risky for savers (confused.com)
- Millions could lose pensions advice, Baroness Greengross warns (dailymail.co.uk)
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