Independent governance committees for workplace personal pension schemes will cost providers £8.5m a year, the FCA says.
Following a damning Office of Fair Trading report into workplace pensions in September 2013, the FCA has set out proposals that will require the providers of workplace schemes to set up and maintain IGCs.
The main purpose of IGCs is to assess and, where necessary, raise concerns about the value for money of workplace schemes.
The FCA says the committees will increase consumer confidence in pension saving and put pressure on fund managers to reduce transaction costs.
In a consultation paper published today, the FCA says the proposals will cost the industry a one-off amount of £2m and ongoing costs of £8.5m a year.
IGCs will have a duty to act in the interests of policyholders, which will include deferred as well as active scheme members.
The FCA says IGCs should have at least five members, the majority of whom must be independent of the firm, including an independent chair.
Their value for money remit will include a particular focus on default funds, as well as administration and governance of the scheme, and the design and execution of the investment strategy.
The FCA says IGCs must present a “credible challenge” to firms on value for money issues.
It proposes a “comply or explain” duty on firms, where they must address the IGC’s concerns or explain to the IGC why they do not intend to do so.
Where an IGC raises concerns which it believes have not been satisfactorily addressed, it is proposed it should be able to escalate its concerns directly to the FCA.
IGCs will also be required to produce a publicly-available annual report of their work.
The FCA says an immediate priority for IGCs is likely to be actions arising out of an audit of high cost and legacy schemes carried out by the Association of British Insurers, as a result of the OFT study. The audit is due to finish in December.
It says IGCs will also have a role in ensuring firms comply with the proposed charge cap on default funds and adviser commission ban for automatic enrolment schemes, and to challenge firms on the value for money offered by third parties such as fund managers.
The regulator says it recognises there may be a tension between the information requested by an IGC and what a firm is willing to provide, and a risk that the cost to firms in providing data may be passed onto members.
In order to “strike the right balance”, the FCA says firms must provide all information “reasonably requested” by the IGC.
The regulator proposes allowing firms with smaller and less complex schemes to set up governance advisory arrangements as an alternative to an IGC.
This would involve appointing a third party to carry out the responsibilities of an IGC, which the FCA says would cost between a third and a half less than an IGC.
It says setting a threshold based on the number of members or funds under management would be “inappropriate” and firms must therefore decide whether to set up a GAA rather than an IGC based on their market share and the complexity of their schemes.