By 30 June, legacy scheme providers will need to have supplied their respective IGCs with data about the schemes, analysis of that data and their proposals for further action. IGCs will then spend the rest of the year assessing value for money, making recommendations, and forming and agreeing an implementation plan with providers to get those recommendations put in place.
This is a significant milestone for defined contribution (DC) workplace pension schemes, and will require IGCs and providers alike to work through the recommendations of the Independent Project Board (IPB) in some detail. The so-called 'legacy audit' addresses the reduction in yield, amongst other things, of workplace schemes not caught by the charge cap which came into effect in April. These schemes are the immediate priority for IGCs and an implementation plan needs to be put in place by the end of the year.
But before providers and IGCs alike become too deeply committed to a particular course of action, it is important that they do not lose sight of the bigger picture - in other words, what they want to achieve through personal pension scheme governance. What "success" looks like from a business, member and regulatory perspective may not always be aligned, but it should still be possible to take a collaborative approach to implementation plans and put something in place which works for all parties.
As a starting point, success will require improved scheme governance by way of discharging legal duties, while at the same time averting the need for further regulatory intervention. The DC workplace market study, conducted by the Office of Fair Trading (OFT) in 2013, concluded that the legal test for making a market investigation reference had been met but, in light of the introduction of IGCs and the legacy audit, a reference was not then appropriate.
Success - or, perhaps more bleakly, failure - can therefore be assessed by reference to whether a market investigation reference is ever considered appropriate for the DC workplace market. IGCs and providers should therefore view their response to the legacy audit as an opportunity to work together now to deliver meaningful solutions which will help render any further regulatory intervention unnecessary.
In very general terms, success may well look like a lower reduction in yield in legacy schemes. How low do reductions and charges need to go? There are some suggestions that IGCs will need to start by asking the provider to rebut a presumption that charges should be no higher than the 0.75% cap now in place for current workplace schemes. This is not a 'requirement' and even where it is used as a starting point, IGCs will still need to address the 10 questions posed by the IPB to ensure that they are not placing too much emphasis on charges or reduction in yield alone when considering legacy schemes.
Providers will also, no doubt, have a sense of what can and should be achieved in relation to their own legacy schemes. It is important to make sure, therefore, that any implementation plan and IGC recommendations take into account all of the relevant considerations – which may involve helping the IGC to understand the nature of the business.
Implementing lower charges or reductions in yield will be easier said that done. For example, what would be the impact on other policyholders in a mutual? Is this achievable in the current schemes given the administration systems and investments which they use?
It is plainly very important to make sure that any implementation plan can, in fact, be implemented. The IPB identified that implementation plans might involve reducing charges or waiving elements of charging structures; closing schemes and transferring members to new schemes; and closing schemes to new members. However, there will be commercial, practical and legal barriers to overcome before such action can be taken.
In particular, without member consent, transfers are far from straightforward in personal pension schemes. Unlike trustee boards in relation to occupational pension schemes, IGCs are not vested with convenient powers by which they can transfer members into new schemes, or switch investments within the same schemes. This sort of activity is very much dependent on the terms of the original underlying contracts and, although there are solutions, these will need to be handled carefully.
Before agreeing and proceeding with an implementation plan, it is important that both IGCs and providers recognise the legal risks and guard against them in the method of implementation.
Tom Barton is a pensions law expert at Pinsent Masons, the law firm behind Out-Law.com.