The Financial Conduct Authority has finalised rules which extend the role of Independent Governance Committees in workplace pensions.
For the first time IGCs will be responsible for overseeing a pension’s provider approach to environmental, social and governance (ESG) investment issues. As part of this oversight, they must consider the concerns of pension members when it comes to where their money is invested, and how the firm approaches stewardship of these investments.
IGCs are now also obliged to consider whether decumulation strategies, via the new investment pathways offer value for money for members, and are helping drawdown investors spend their pension safely.
Until now IGCs only looked at whether accumulation strategies offered value for money to members.
These rules will come into force in April 6 2020. IGCs have oversight of all contract based pensions, including stakeholder, group personal pensions and Sipps.
This new regulation brings the remit of IGCs more closely in line with new trustee duties on master trusts and other trusts-based workplace schemes.
Aegon’s pension director Steven Cameron says: ““We support the FCA’s key proposal to extend the IGCs’ remit to consider ESG issues as well as stewardship.
“This is a growing area of customer focus, and the input of the IGC will help ensure the industry delivers solutions in line with customer expectations.”
He adds: “With investment pathways going live in August, it was important that the FCA clarified the role of IGCs without further delay. Requiring IGCs to effectively endorse the value of the pathways ahead of launch is a new role for IGCs and comes close to an ‘executive’ role.
“IGCs are now established in challenging providers on value for money for workplace pensions. This goes beyond charges to include assessing customer service, the quality and clarity of communications, investments and security.
“Investment pathways are a brand new concept, designed to provide those who go into drawdown without seeking advice a broadly appropriate investment strategy. A wide range of individuals with different attitudes to investment risk may opt for each of the four pathways, so the specific investment strategy can only ever represent a broad fit and can’t mirror individual attitude to investment risk. IGCs will need to build this into their value for money assessment.”
Hargreaves Lansdown senior analyst Nathan Long says: “‘The financial services regulator has given a ringing endorsement of IGCs by extending their remit to watch over pension schemes.
“Specific oversight of how pension investments consider ESG issues in the sustainability of investments should lead to a renewed focus on using pensions to invest for good.”
He says that initially this oversight will lead to some “tinkering” of investments in default schemes, so funds will look more “slightly more” climate aware in the coming years than they do today.
But he adds the effects will be more significant over the longer term. “Over time we expect to see people given much more personal choice of where there money is invested, with more options that better reflect their personal values being included in company pensions.”
Hymans Robertson head of governance Laura Andrikopoulos adds: ““This FCA’s decision to significantly widen the powers of IGC’s will be welcomed by many and is a strong step forward by the financial services regulator.
“High-quality governance oversight is crucial to the effectiveness of the UK pension system.
“If these powers are used well and respected, they could increase the extent to which IGCs are a real force for good. However, it’s important today’s move is not simply perceived as another layer of bureaucracy and that committees avoid becoming paralysed by attempting to take each members view on a wide range of issues into account.”