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IGC Terms of Reference Workshop, Eversheds LLP, London

  • United Kingdom
  • Employment law - HR E-Brief

14-11-2014

This note summarises the key points that came out during the discussion at the recent workshop hosted by PTL and Eversheds on terms of reference for independent governance committees (IGCs). The main areas that we explored in this workshop were: 

  • the interaction between the IGC and the provider
  • the output from an IGC
  • the role and duties of an IGC.

We plan to arrange a further workshop in London in January 2015 to discuss the areas that we did not have time to cover at this session and to consider the FCA’s final rules for IGCs. We will confirm the date for this workshop shortly.

Summary 

  1.  Interaction between IGC and provider
  • There is a need to consider the interaction between the IGC and provider at two levels:

(i) day-to-day matters; and

(ii) escalation of concerns and formal reporting requirements.

There are likely to be different processes for these which will need to be identified in the terms of reference and/or separate policies.

  • It is essential to identify the reporting lines between the IGC and the Board. In particular:

(i) Will the IGC have direct access to the Board or will there be an intermediate level of reporting? If there is an intermediate level of reporting for day-to-day enquiries, issues and requests it was generally felt that an IGC should have the ability to go directly to the Board on key issues.

(ii) Will providers have an “IGC manager” who will be responsible for helping the IGC fulfil its role and for managing the provider’s relationship with the IGC?

  • The employee representatives on a IGC will play a key role in sense checking potential recommendations and requests from the IGC before they are escalated further as they will have the best insight into any limitations that the provider might have in terms of its systems, ability to provide information etc.
  • It was generally agreed that an IGC should prepare a regular report for the provider’s Board which would contain management information on what the IGC has been doing (so that the Board can ensure that it is discharging its obligations) and to identify any issues or concerns that the IGC wishes to raise with the Board. Minutes of IGC meetings could also be included in the pack for Board meetings. 
  • The IGC should produce a business plan and report on progress against this to the Board on a regular basis.
  • It is essential that the Board are given a right to reply to any concerns, recommendations or requests raised by the IGC Board and a reasonable timescale for doing so. The timescale within which a response can be expected from the Board should be agreed with the IGC. This could be set out in the IGC’s terms of reference or a separate policy document.  
  • A tricky issue is what happens where the Board agrees with an issue raised by the IGC but cannot do anything about it? 
  • It was generally agreed that the IGC’s annual report should go to the Board for review and comment before it is finalised. 
  • It was suggested that an IGC should prepare a policy on when and how matters would be escalated to the Board and, if necessary, to the FCA and beyond. 
  • The IGC should be given a budget each year to enable it to perform its functions. A process for requesting additional funding should also be put in place. IGCs need to appreciate that requests for additional funding or resources will ultimately cost the firm and potentially passed on to scheme members. So IGCs need to ensure that they are delivering value for money too. 
  • An IGC must be given enough administrative support to enable them to perform their role and this must be provided in a way that does not compromise the independence of the IGC.
  • There may be a tension where an IGC requests information which a provider is unable to obtain without incurring significant cost and/or requiring significant resource.  
  • It was suggested that the IGC and provider should develop an information sharing protocol which could set out what information will be provided to the IGC as standard and how requests for additional information will be dealt with. IGC members’ contracts should require any information provided to the IGC by the provider to be kept confidential. 
  • IGCs should have the ability to appoint their own advisers but a process for doing so should be agreed with the provider so as not to cut across the providers’ panel firms.
  • It was generally felt that the IGC should interact with other parts of the provider’s business (e.g. with profits committee, investment managers etc) through a nominated person (e.g. IGC manager or employee IGC member) rather than approaching them directly.
  • It was agreed that an IGC could be made up of the same people who act as the trustees of a provider’s master trust and that this would have some real benefits. However, it is probably helpful to have separate meetings or have separate agenda items and record the meetings separately to help delineate between the two functions. 
  • Thought also needs to be given to the interaction between the various IGC members. For example, how will they communicate on a day-to-day basis and how do they make decisions in between meetings?
  • Will IGCs need to be included in new product development to ensure any new products are acceptable to the IGC? This additional step in the product development processes could be avoided if the IGC produced and maintained a policy on how they will assess value for money (see below) which those developing new products within the provider could test any new products against. However, this is dependant on the IGC only using objective tests to assess value for money which could then be applied by the product developers and this is unlikely to be the case given that assessing value for money is likely to include subjective considerations.  
  • IGC members will need to be familiar with the providers business, products and systems. This should be part of the induction requirements for new IGC members and there should probably also be a regular refresher. 

2.      Output from IGC

  • A key priority for IGC will be producing a business plan and prioritising its tasks.
  • IGC should prepare management information for the Board and report against its business plan regularly.
  • It is anticipated that IGCs will have a key role to play in addressing the legacy issues identified by the Independent Project Board.
  • It was suggested IGCs should develop policies on (amongst other things):

(i) assessing value for money;

(ii) escalating issues to the Board, the FCA and beyond;

(iii) managing conflicts of interest (a conflicts register should also be maintained);

(iv) interaction with members; and

(v) information sharing with provider.

  • These policies would enable the terms of reference to be less detailed and they would be easier to update. They would also not be required to be published on a provider’s website or disclosed to members.
  • Providers could request that they are consulted on the development of these policies. 
  • IGCs and providers will need to consider how practically the IGC will interact with scheme members.  
  • IGC members should be required to identify training needs, undertake regular training and keep a record of this. 

3.      Role and duties of IGC

  • A key function of an IGC is to assess value for money. However, it is not clear how IGCs should assess this. It was hoped that some form of industry consensus would emerge.
  • Assessing value for money involves an absolute assessment (i.e. does this particular fund/scheme represent value for money in its own right?) and a relative assessment (i.e. how do the costs and charges for this fund compare with similar funds which are available on the market?).
  • Benchmarking will play a key role in assessing value for money. 
  • It was suggested that an IGC should develop and maintain a policy which sets out how it will assess value for money. This could be developed with input from the provider. 
  • It was generally felt that IGCs should be assessing what is there rather than questioning the philosophical starting point of the provider (e.g. active v passive). 
  • It was noted that the National Audit Office has produced guidance on value for money for Government departments which, although not directly applicable, could be helpful in forming a view on how to assess value for money. 
  • IGCs will cover active members and are likely also to cover deferred members of workplace personal pension schemes. There was uncertainty over whether deferred members would only include those individuals who become deferred members from April 2015 onwards or whether it would also include existing deferred members. Some providers may be unable to identify the latter. It is hoped that this will be clarified in the final version of the FCA’s rules. It was suggested that the coverage of existing deferred members could be subject to a proportionality requirement (i.e. that existing deferred members should only be covered to the extent that a provider can identify them without incurring excessive costs).
  • A key difference between an IGC and trustees is that if trustees don’t think a fund/manager offers value they can change it, whereas an IGC has to stick with the particular provider and they do not have the power to change things themselves.

4.      Other issues 

  • The terms of reference will need to set out the decision-making requirements for the IGC, including:

(i) quorum requirements (it was generally agreed that an IGC would lose its legitimacy if the independent members were not in the majority at any decision-making point);

(ii) whether decisions are made by majority vote, protected majority or, in some cases, unanimity (e.g. removal of a fellow IGC member or removal of Chair); and

(ii) whether the Chair will have a casting vote (this may be necessary, for example, if an even number of IGC members attend a meeting or where there is a vacancy).

  • The terms of reference should set out the circumstances in which an IGC member may be removed. This should be referred to in the contract with every IGC member to enable the provider to terminate that contract where the individual/corporate ceases to be an IGC member in accordance with the terms of reference.  

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