Jacqueline Reid: Will independent governance committees bridge the governance gap between trust and contract-based pensions?

The government wants to ‘bridge the gap’ between governance standards in trust- and contract-based pension arrangements.

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Following increased government scrutiny of defined contribution pensions, providers of contract-based pension arrangements will have to introduce and maintain independent governance committees (IGCs) from April 2015. 

These changes apply to personal or stakeholder pensions run by firms regulated under financial services legislation but not to occupational trust-based schemes.

In a trust-based model, schemes are run by trustees, who operate independently from their sponsoring employers, and have duties to look after members’ interests. There is currently no equivalent for contract-based arrangements.

The government will change this by transposing certain trust law duties into requirements for IGCs. In particular, IGCs acting independently, will have to assess and report on the extent to which their providers’ schemes offer value for money for their members.

The jury is out, however, on the extent to which this will bridge the governance gap. IGCs can make recommendations, which providers can (but are not required to) implement for future members.

IGCs can also whistleblow to the Financial Conduct Authority, employers or members where they feel that the provider has not addressed their concerns satisfactorily. However, IGCs cannot, in reality, make changes to improve value for money for existing members.

Even where it is clear that a fund is underperforming, neither IGCs nor providers can vary existing members’ contractual pension arrangements by moving their savings from that fund without members’ express consent. This is in contrast to trust-based arrangements where trustees typically have powers to replace underperforming funds. 

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Over time, the interplay between IGCs’ duties to act in members’ interests, the practical limitations on their powers and the need to balance their actions against the provider’s commercial priorities will become more established. In the meantime, IGCs are likely to focus on developing an independent culture and effective dialogue with providers while they watch this space.

Jacqueline Reid is a senior lawyer at Linklaters