This is a major milestone in the governance of workplace defined contribution (DC) personal pension schemes, and both the annual report and any proposed follow-up action will be under the microscope.
By this stage, IGCs and providers will be well on course to finalise their first annual reports - but ticking off the relevant content for compliance purposes is, in many respects, the easy bit. The difficult thing is to make sure that the content delivers the right message and demonstrates the right solutions to any issues identified.
What does the report need to say?
The purpose of the annual report is to provide a public record, and to make sure that the work of the IGC is accountable. Everyone with an interest in the work of an IGC will be able to have a look at what it has been up to – and pass comment.
The content of the report is highly prescribed by FCA rules and needs to cover the following:
- the IGC's opinion on the value for money (VfM) of the scheme;
- how the IGC has considered relevant policyholder interests;
- any concerns raised by the IGC and the response received;
- how the IGC has the right qualities to do the job;
- how each independent member of the IGC really is independent;
- the arrangements put in place for policyholder representation.
Some commentators have predicted that scheme members won't actually read the reports. Indeed, the OFT market study that gave rise to IGCs observed that scheme members are reliant on their employers to make most of the decisions about their pensions for them. Members may, however, gain an understanding about VfM and the annual report indirectly from their employers and from coverage in the media.
What will employers make of the annual report?
Those employers that are engaged in the governance process, with their own pensions management committees, are likely to be very interested in the outcome of the annual reports. Where an employer has worked hard to select a quality pension proposition for retention and recruitment purposes, it will want to see the annual report give the provider's scheme a clean bill of health from a VfM perspective.
As well as the content, the timing of these first annual reports is significant for employers too. Three years after the introduction of automatic enrolment for the largest companies, they will now be getting ready for re-enrolment - and poor VfM findings may be just the sort of thing to push business the way of an apparently better-performing provider.
Less engaged employers are likely to remain disengaged to a greater or lesser degree. Indeed, this was the crux of the problem identified by the OFT's market study: that members are not looking after themselves and, on the whole, their employers lack the capability and/or the incentive to do it all for them. The new governance regime is a good start, but we probably need a fair bit more than an annual report to help those less engaged employers see the point of voluntary governance and the benefits of good outcomes for their workforce.
Who else will be interested in the information?
In the nicest possible way, other IGCs will want to copy the best bits of good annual reports so that their next ones look even better. IGCs are under pressure both to deliver, and to be seen to deliver.
Trustee boards will do the same thing for their own annual chair's statement, particularly in relation to any good VfM-related science.
There will be any number of other interested parties, each with its own reason to scrutinise the reports when they are published. Providers, employee benefit consultants, advisers, the regulatory authorities, consumer groups and the press will all scrutinise the annual reports to identify various opportunities, regulatory and policy issues, and any particular practices that might be interesting.
A focus on success
IGCs should keep the questions of what they are trying to achieve with their annual reports and why in mind on a rolling basis. Previously, I concluded that the industry should be targeting a general improvement of VfM, thus negating the need for any further regulatory action across the industry.
In the case of a particular IGC and its provider, the aim should be a collaborative effort to deliver on the objects set out in the FCA rules as well as the recommendations of the Independent Project Board in relation to legacy schemes. As things stand, none of the IGCs have seen fit to escalate any unresolved concerns to the FCA. It means that providers are working with IGCs to provide information and deal with any recommendations.
It is likely that some of the annual reports will highlight areas for improvement. In a sense, that is the whole point. However, it will take some very careful language to get this message across in the right way. Annual reports should aim to instil faith in the workplace pensions system, not further undermine it.
Planning for the future
IGCs are there to fill a perceived governance vacuum. Their work is likely to be supported by various existing functions of the provider business. The new system of charges and governance, of which IGCs form an important part, means that we now have robust protections in place to support savers. It is important that employers and members get this message.
In addition to the FCA rules, IGCs will also need to comply with any additional objectives set out in their particular terms of reference. The reports should also address the questions posed by the Independent Project Board in relation to the legacy audit. This year's annual reports will not be able to provide extensive analysis of transaction costs or describe fully-formed member representation arrangements. Where this is the case, it is worth running with the point at a fairly early stage from April 2016 to make sure the next report addresses these points in more detail.
The next pressing issue will be moving towards implementing the recommendations set out in the IGC's annual report, as set out in the implementation plan. There may be legal barriers that need to be overcome before implementation plans can be put in place. Although these barriers are generally surmountable, you should exercise a degree of caution with any promised action.
Tom Barton is a pensions law expert at Pinsent Masons, the law firm behind Out-Law.com.