New Financial Conduct Authority (FCA) rules require Independent Governance Committees (IGCs) to oversee so called “investment pathway solutions” for those going into drawdown on a non-advised basis.
Ultimately clients will bear the costs of these new rules. They will also bear the implicit cost of delay of other, possibly more valued, developments while providers ready themselves.
So is this a case of “Can’t pay? Don’t play?”
First of all, what is an IGC?
An IGC is a group of independent experts who represent the best interests of a pension provider’s customers.
Pension providers were ‘treated’ to an early Christmas present from the FCA last December. Namely, a Policy Statement that extends the remit of IGCs in two specific areas.
Firstly, IGCs must supervise their provider’s policies on environmental, social and governance (ESG) issues, as well as member concerns and stewardship for the pension products that they oversee.
Secondly, they must consider the ‘value for money’ of investment pathway solutions1 for pension drawdown, which are due to commence from 1 August 2020.
Government legislation demanded that IGCs be set up from 2015 to provide independent oversight of the value for money of providers’ workplace pension schemes. An alternative version, Governance Advisory Arrangements (GAAs), can perform similar duties where the schemes are less complex and have fewer members.
What is the role of IGCs?
The initial focus of IGCs was on the ‘accumulation’ of funds within workplace pension schemes. This Policy Statement extends IGCs’ remit to the ‘decumulation’ phase. Put another way, this is where scheme members start to take benefits from their pension fund.
In this FCA's own words, this is . . .
"“…the final part of our package of measures to improve outcomes for non-advised consumers accessing their pension savings through drawdown.""
This widening of responsibilities to include investment pathway solutions was not unexpected. Two FCA Consultation Papers released during 2019 addressed this, as part of their ‘Retirement Outcomes Review’ of the ‘pension freedoms’ that were introduced by the Government in 2015.
What was unexpected, however, was the time it took them to release this Policy Statement. The related consultation period ended in mid-July 2019 and, arguably, they had already made up their mind a year ago.
What is the impact of this delay?
Timescales are now tight for those pension providers who do not already have an IGC or GAA, but who intend to offer pathway solutions through their relevant products. One example of this is a Self-Invested Personal Pension (SIPP) provider who does not also operate workplace pension schemes.
The FCA states that their final rules on the remit extension come into force on 6 April 2020. Therefore, providers in this situation need to have established an IGC or GAA by that date.
Why 6 April 2020? Because the FCA states that the IGC or GAA needs to assess - and raise any concerns about - the proposed design and charging structure of the provider’s pathway solutions before they are launched to non-advised scheme members from 1 August 2020.
This could involve a significant amount of work and expense for providers in a very short space of time. That means frustrating and delaying other plans they may have, such as expanding their tools and resources for members and their advisers.
Speaking of cost, and in a display of opinion aimed at ‘smaller’ (their word) pension providers, the FCA then states, “. . . we think that firms that cannot afford an IGC or GAA for pathway solutions should not be offering these products”.
The FCA’s motives . . . Another agenda?
There may be an ulterior motive here. In playing their IGC card, the FCA may be deliberately trying to limit the offering of pathway solutions to ‘bigger’ pension providers who command a larger market share.
By way of an easement in their rules, a provider will not have to provide their own pathway solutions if they have fewer than 500 non-advised consumers entering drawdown each year.
As a result, these providers will not have to establish an IGC or GAA. However, providers that do not qualify for the easement will still need to do so annd the FCA’s view is that “the benefits are worth the additional cost”.
In contrast to the FCA’s view, we believe that the minimum viable scale is considerably more than 500. The FCA’s insistence on using this figure therefore creates a very wide chasm for growing providers to cross.
Opposition from SIPP providers
This change comes despite strong opposition to the new rules from SIPP providers in their consultation responses. This is particularly the case where, with ‘value for money’ in mind, they have to pass on the costs associated with the establishment and ongoing operation of an IGC or GAA to members who use their pathway solutions.
Although stating, “We have considered carefully the concerns of SIPP operators”, most of the proposals within the FCA’s initial Consultation Paper now form the rules within their Policy Statement. In other words, their ‘careful consideration’ has not resulted in any changes to the first draft of their rules!
"The FCA plans to review the effect of these news rules one year on. It should take account of the costs – including the opportunity costs – of IGCs."
Capped charges on pathway investments?
Perhaps the true ulterior motive can be found in the section of the Policy Statement headed, “What we will do next”. One year after the implementation of investment pathways (that is, August 2021) the FCA will review the impact of these rules. As part of this review, it will also evaluate the success of IGCs and GAAs in making sure that the pathway solutions do offer value for money. If they don’t, that could give the FCA the ‘green light’ to introduce capped charges on pathway investments.
This is similar to the way that default funds within workplace pension schemes have had their annual investment charges capped. To date this has remained a veiled threat throughout the various Retirement Outcomes Review papers.
For more information about any of the topics discussed, please contact your usual Barnett Waddingham consultant or get in touch below.
1. For additional background reading on ‘investment pathway solutions’ are, please see https://www.barnett-waddingham.co.uk/comment-insight/news/sipp-operators-placed-commercial/
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