Normally at this time of the year I would be reading IGC reports and commenting on them. In future reports will be published by the end of September and will be considerably more challenging for IGCs to produce. In this blog I look at the new requirements on IGCs with regards Value for Money. I will be mainly commenting on workplace pension savings schemes though VFM applies equally to Investment Pathways, which I will return to in a later blog.

I have re-read several long papers published on IGCs and VFM by the FCA and reviewed COBS 19.5 . I conclude that the IGCs are in a tight corner and need some help to meet this year’s deadline and do the job the FCA requires of them.

The story so far

In November last year, the FCA laid down new instructions to Independent Governance Committees in a policy statement. PS 21-12

This policy statement confirmed the FCA  are introducing new rules and guidance requiring IGCs to:

a. Take into account 3 key elements of VFM: costs and charges; investment performance; and services provided (including member communications).

b. Assess and report on VFM, particularly through comparison with other options on the market.

c. Consider, as far as they are able to, whether an alternative scheme or schemes would offer better VFM and inform the pension provider or the pathway investment provider if so. If the IGC is unsatisfied with the pension provider’s response, the IGC should also inform the relevant employer where this could make a difference to the outcome of members of the scheme.

d. Set out their overall assessment in their reports about whether the scheme or pathway investment provides VFM.

e. Explain how they have assessed VFM in their reports and keep relevant evidence they relied upon for at least 6 years.

What’s the FCA’s problem?

The FCA says it wants to enhance  the IGCs’ ability to effectively assess and compare VFM of pension products and services, thereby improving outcomes for consumers in workplace
pensions and investment pathway solutions.

It says it previously found wide variation in the approaches taken by IGCs and in the quality of VFM assessment, with some reports containing insufficient information around how VFM was assessed in practice.

Consequently, it was sometimes unclear how IGCs arrived at certain conclusions about
VFM ratings from their annual reports to members.

So how will things improve?

The FCA’s attitude towards the IGCs is hardening, after 6 years of trying “this time it’s serious”, seems to be the message.

a) To begin with, the FCA are expecting IGCs to collect data that assesses not just charges, but scheme performance and the services that member pay for – such as access to information, help with pot management and the choice of retirement options.

In my view, this cannot be done without knowing what good and bad looks like, there need to be benchmarks and that means understanding what other schemes are achieving.

This requires some central repository of information from which IGCs (and GAAs) can draw.

b) Next the FCA is expecting this data to be combined into a value for money assessment which compares alternatives (GPP v GPP  – investment pathway with investment pathway).

This means finding a way of comparing what may seem disparate products in such a way that people can see not just whether people are getting VFM in the IGC’s eyes, but against an objective correlative (by comparison with peers)  other GPPS – other investment pathways.

c) Then the information has to be used so , where VFM isn’t happening at across the board , or for particular participating employers, the IGC brings this to the provider’s attention.

Where the provider takes no action, the information is then presented to the employer. There is some discretion for IGCs here but not much. It looks from September 2022 as if IGCs may need to formally inform  employers that their workplace pension isn’t cutting the mustard (e.g.  where members of the scheme are getting poor outcomes).

d) Make the assessments public and a matter of record, through IGC reports. This means that providers and employers will be on the hook if remedial measures aren’t taken. Whether this naming and shaming happens is open to conjecture, I am sure that reports will attempt to anonymise what is going on and it will be interesting whether journalists can challenge this anonymity.

e) Explain how the IGC has gone about things and keep public records of assessments for 6 years. This keeps the provider in the dock for a number of years. It means that the IGC’s report will hang around like a bad smell ready for any employee or employee representative to require action is taken.

My ratings on IGC Chair reports go back to 2016

Make or break time for some IGCs

In my view, this is make or break time for some IGCs. If they knuckle down and do comparative  VFMs , they will start to become relevant to certain employers whose employer scheme is called out as “in special measures”. But will IGCs deliver this message or back away from criticising directly the product offering of the company paying them?

For IGCs to move forward, they are going to have a lot of market intelligence which means sharing of resources and access to comparative information on performance, charges and services. This information is currently sufficiently imperfect to allow IGCs to argue that they have no proper basis of comparison.  The way out of this is for IGCs to require information on selected employer schemes to be shared between each other. If they do not want to do this voluntarily, the FCA should insist on it being done.

If an IGCs can achieve a consistent view on costs, performance and services , then there is hope for its future, but if there is no standardisation, data sharing and clear disclosure, I can see no long term future for that IGC. It is therefore in an IGCs self-interest as well as the interests of those it serves , that a standard way of comparing performance  and services is found, to compliment the cost and charges tables.

If the IGC is not satisfied with the response of the firm’s governing body, the IGC Chair may escalate its concerns to the FCA, if appropriate. The IGC may also make its concerns public.

The FCA and TPR published a paper on how VFM was to be measured, responses to which were due in December. Reading the relevant section of COBS while it is clear what an IGC has to measure by way of costs and charges, there is no measure of performance or list of relevant services that could be included in a VFM assessment.

This is the IGC’s dilemma. They are under micro-management but have been given no clarity on the detail on how to perform these new duties. The detail they are told is coming but they only have until 30th September to do the work.

Failing to do the work could lead to censure by the FCA. This is beginning to feel uncomfortable. It would be helpful to hear from tPR and FCA as soon as possible as to what they expect in detail , for this major task to be completed between now and the end of the summer.