New powers for IGCs
Slipped into the wash-up of consultation responses and Calls for Input published in the last full business week of 2019 was the FCA’s PS19/30 which substantially extends the role of IGCs
IGCs currently provide independent oversight of the value for money of workplace personal pensions in accumulation, ie before pension savings are accessed.
The FCA’s final rules extend the remit of IGCs, with:
a new duty for IGCs to consider and 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 (pathway solutions)
You might wonder why the FCA consider this worthy of its own Policy Statement.
Here (in the FCA’s words) is why this is relevant
The new rules and guidance will mainly affect:
- firms that intend to provide pathway solutions and firms that provide workplace personal pensions
- IGCs and GAAs
- third party firms that provide GAAs or are considering whether to provide GAAs
- consumer representative groups with an interest in ESG issues and pensions
- all firms that provide pension products and all life insurers that provide investment-based life insurance products
The rules will also be relevant to stakeholders with an interest in pensions and retirement issues, including:
- individuals and firms providing advice and information in this area
- distributors of financial products, in particular retirement income products
- trade bodies representing financial services firms
- charities and other organisations with an interest in the ageing population and financial services
Consumers will also be affected by the rules.
(GAA’s are “baby IGC’s” and are for firms that – however big- aren’t big players in workplace pensions. St James’ Place has a GAA).
To use an anatomical analogy, IGCs are the liver of the pension body politic. They are there to ensure that impurities get cleaned up and that our pensions stay healthy so they can deliver value for our money.
The liver isn’t very glamorous and neither are IGCs, but without them , workplace pensions could revert to the bad old days where costs and charges were uncontrolled and funds were raided to pay every Tom, Dick and Sally with a sales hat on.
Most people think of value for money as about these cost and charges but this extension of the IGCs restores focus on value.
Research from organisations such as Quietroom , Ignition House and Investec shows that the further people are from retirement, the less concerned they are about the money arising from their saving and the more concerned about the money in their pension pot.
The concern about the money in the pot is that it is being put to good use. Most young people would not articulate “good use” as “ESG”, they might agree with a phrase like “responsibly invested” and they’d certainly agree with the ideas behind environmental , sustainable and well governed investments.
IGCs matter a lot more, if they are seen as the guardians of these values and the enforcers of ESG policies ensuring our money is invested responsibly.
And Trustees matter too
Historically, pension scheme trustees managed pension trusts set up by employers for their staff. The pension was an employee benefit and a perk provided by a good employer.
Auto-enrolment has changed the role of the defined contribution trustee who is now likely to be in charge of an occupational pension scheme funded (at least in part) by contributions employers have to make. The pension scheme is no longer a perk, but a part of the employer’s duties and employee contributions are deducted by default , meaning we have to take a conscious decision not to be in a pension scheme.
This has substantially changed the role of the trustee; DC trusteeship just got a whole lot more serious. Since the introduction of the Master Trust Authorisation regime, overseen by the Pensions Regulator, trustees of multi-employer master-trusts are – like IGCs – under considerably more scrutiny and have much wider powers.
Like IGCs, master trusts have trustees – and those trustees are also responsible for detoxifying pension investments by overseeing the ESG policies of the funds on the trustee’s investment platform.
The scrutiny is primarily from the regulator but it also comes from independent governance experts like Share Action , who have in recent times, moved into fund and fund platform governance in a big way.
Just before Christmas 2019, they published a review of master trust ESG policies and divided the 16 leading master trusts into learners- builders- implementers and leaders. Share Action had only one “beginner” – NOW pensions” and only one leader “NEST”, the rest of the master trusts were either on their way or well down the road to getting ESG in place.
Two new duties that matter to us all
Most pension practitioners will be familiar with the issues DC savers face in choosing their investment pathway at retirement. I have not space to go into this important topic but it is good that the IGC remit has been extended to oversee it. The best practice demonstrated by these super-fiduciaries should be of interest to all practitioners , especially financial advisers who manage and/or advise on client’s retirement savings.
The work being done by trustees and IGCs to ensure that funds on their platforms meet high standards of ESG, should also be of interest to us all. I would urge al advisers to read the Share Action report which is downloadable from its website and to study the chair statements of both master trusts and IGCs (mainly published in April). They are most instructive.