In October 2021 the FCA issued its Policy Statement and final rules on how Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) should compare value for money offered by the pension schemes they oversee.  

Background

Providers of workplace personal pension schemes and investment pathways for income drawdown are required to appoint IGCs (or GAAs in the case of smaller firms) to assess and report on the value for money of providers' products.  The introduction of the new rules follows an FCA review which found that some IGCs and GAAs were failing to challenge providers who were at risk of not providing value for money (VFM).

The new requirements

The new rules will require IGCs* to consider the following three key factors when assessing VFM (though IGCs may consider other factors too):

• the level of costs and charges;
• investment performance; and
• quality of service, including whether communications are fit for purpose and core financial transactions are processed promptly and accurately.

IGCs will be required to assess and report on VFM through comparison with other options on the market.  IGCs must consider, as far as they are able to, whether an alternative scheme or schemes would offer better VFM.  If so, they must inform the pension provider.  If unsatisfied with the provider's response, they should also inform the relevant employer where this could make a difference to the outcome for scheme members.  (The FCA give schemes with only deferred members as an example of a situation where writing to the employer will not alter the outcome.)

IGCs must set out their overall assessment in their reports about whether the scheme/investment pathway provides VFM.  They must explain how they have assessed VFM and keep relevant evidence for at least six years.

The new rules came into force on 4 October 2021.  IGCs have until the end of September 2022 to publish their next report.

FCA and Pensions Regulator VFM discussion paper

In a separate but related development, in September 2021, the FCA and the Pensions Regulator published a joint discussion paper on developing a common framework for measuring VFM in DC pension schemes.  This included seeking views on how investment performance might be measured in a way that takes into account the likely differences in asset allocation according to the age of the member concerned.  It sought views on splitting member cohorts into three groups according to the number of years to the member's target retirement date, or whether schemes should be required to publish age-specific returns for savers aged 25, 45 and 55.  It also sought views on whether it would be helpful/possible to establish a benchmark for measuring investment performance or whether cohorts should be compared against a market average or a few selected similar schemes.  The paper also sought views on what other factors (eg quality of communication) should be included in VFM assessments.

The FCA and Pensions Regulator plan to publish a Feedback Statement in 2022 setting out feedback received to the discussion paper and their next steps.

Our thoughts

How to assess VFM is currently a key area of focus for the FCA, so where providers are considering the composition of IGCs, we think they should focus on individuals' expertise in this area.  We consider ESG strategy to be another key area to focus on.  The FCA has not included ESG as a separate component of VFM, but considers that different ESG factors should be considered under the three key factors, ie costs and charges, investment performance, and quality of service.

*References to IGCs include GAAs unless otherwise stated.