COBS 19.5 1Independent governance committees (IGCs) and publication and disclosure of costs and charges4

This section applies to:3

1. (1)

   a firm which operates a relevant scheme in which there are at least two relevant policyholders; or3

2. (2)

   a firm which offers or has decided to offer a pathway investment.3

3In this section:

1. (1A)

   “employer pension arrangements” means an arrangement where eligibility for membership of that arrangement or section is limited to the employees of a specified employer or employers;5

2. (1AA)

   “investment performance” means the investment performance of the:5

   1. (a)

      pension savings of relevant policyholders; or5

   2. (b)

      the drawdown fund of pathway investors;5

3. (1)

   “drawdown fund” means either a capped drawdown pension fund or a flexi-access drawdown pension fund;

4. (2)

   “offer” means where a firm (F1) makes a pathway investment available for investment in the drawdown fund which F1 operates, where the pathway investment is either:

   1. (a)

      manufactured by F1; or

   2. (b)

      manufactured by another firm (F2);

5. (3A)

   “pathway investment comparators” means other pathway investments (that are not provided by the firm) selected by an IGC under COBS 19.5.5R(2A)(e)(i) to (iii) and which:5

   1. (a)

      are individual pathway investments; or5

   2. (b)

      are cohorts of similar pathway investments;5

6. (3)

   “pathway firm” means a firm which offers a pathway investment;

7. (4)

   “pathway investor” means a retail client investing in a firm’s pathway investment;

8. (5A)

   “scheme comparators” means other pension arrangements (that are not provided by the firm) selected by an IGC under COBS 19.5.5R(2)(e)(i) to (iii) and which:5

   1. (a)

      are individual employer pension arrangements; or5

   2. (b)

      are cohorts of similar employer pension arrangements;5

9. (5AA)

   “services” refers to the services provided by a firm to relevant policyholders or pathway investors and includes:5

   1. (a)

      the communications issued to relevant policyholders or pathway investors; and5

   2. (b)

      the administration of the relevant scheme or pathway investment;5

10. (5)

    “referring” means a firm which arranges for a retail client to invest in a pathway investment available through a transfer to the drawdown fund operated by another firm (F2), where F2 offers its own manufactured pathway investment;

11. (6)

    “stewardship” relates to a firm’s exercise of rights or engagement activities in relation to the investments attributable to the firm’s relevant policyholders or pathway investors, and may include:

    1. (a)

       the exercise of a firm’s voting rights in those investments; and

    2. (b)

       monitoring and engaging on matters such as strategy, performance, risk, culture and governance of the investments;

12. (7)

    “IGC’s remit of review” means the remit of the IGC as described in COBS 19.5.5R(2), COBS 19.5.5R(2A), COBS 19.5.5R(2B), COBS 19.5.5R(2C), and, where applicable COBS 19.5.5R(2D) and COBS 19.5.5R(2E).

A firm (Firm A) must establish an IGC, unless:3

1. (1)

   Firm A has established a governance advisory arrangement in accordance with COBS 19.5.3R; or3

2. (2)

   another firm in Firm A’s group has already established an IGC under this section, and Firm A has made arrangements with that IGC to cover a relevant scheme operated by Firm A or a pathway investment offered by Firm A.3

1. (1)

   If a firm considers it appropriate, it may establish a governance advisory arrangement instead of an IGC, having regard to:3

   1. (a)

      for a relevant scheme operator, the size, complexity and nature of the relevant scheme it operates; or3

   2. (b)

      for a pathway firm, the size of the take up, or expected size of the take up, complexity and nature of the pathway investment.3

2. (2)

   If a firm has decided to establish a governance advisory arrangement rather than an IGC, this section (other than COBS 19.5.9R (2), COBS 19.5.9R (3), COBS 19.5.10 G, COBS 19.5.11 R and COBS 19.5.12 G) apply to the firm by reading references to the IGC as references to the governance advisory arrangement.

3. (3)

   A firm must establish a governance advisory arrangement on terms that secure the independence of the governance advisory arrangement and its Chair from the firm.

A firm must include, as a minimum, the following requirements in its terms of reference for an IGC:

1. (1)

   the IGC will act solely in the interests of:3

   1. (a)

      relevant policyholders and any other members or clients a firm asks the IGC to consider; or3

   2. (b)

      pathway investors;3

2. (2)

   the IGC will assess the ongoing value for money for relevant policyholders delivered by a relevant scheme particularly, though not exclusively, through assessing the three factors in (a) to (c) below, taking into account the specific points in (d) to (g):5

   3
   1. (a)

      the level of charges and costs, in particular:5

      1. (i)

         administration charges and any transactions costs borne by relevant policyholders; and5

      2. (ii)

         any other charges borne by relevant policyholders and any other costs incurred as a result of managing and investing, and activities in connection with the managing and investing of, the pension savings of relevant policyholders;5

   2. (b)

      investment performance; and5

   3. (c)

      the quality of services including whether:

      1. (i)

         the communications are fit for purpose and properly take into account the characteristics, needs and objectives of the relevant policyholders; and5

      2. (ii)

         core financial transactions are processed promptly and accurately, such as processing contributions, transfers or death benefits;5

   4. (d)

      as part of the ongoing value for money assessment in (2), the IGC will need to consider whether to assess the relevant scheme by reference to employer pension arrangements on an individual basis or on an aggregated basis using cohorts of sufficiently similar employer pension arrangements, or a combination of both, to enable the IGC to produce a value for money assessment that is the most useful for the members of the relevant scheme, but which is also appropriate and proportionate in the circumstances; 5

      3
   5. (e)

      as part of the ongoing value for money assessment in (2)(a)(i), (b) and (c), the IGC will need to: 5

      1. (i)

         consider whether individual employer pension arrangements or cohorts of employer pension arrangements, or a combination of both, would be most appropriate to be part of its scheme comparators taking into account the proportionality and usefulness of each;5

      2. (ii)

         (where it selects cohorts of employer pension arrangements as part of its scheme comparators) select sufficiently similar employer pension arrangements that enable the IGC to produce an assessment that is the most useful for the members of the relevant scheme;5

      3. (iii)

         select a small number of reasonably comparable scheme comparators (including those which could potentially offer better value for money in respect of factors (2)(a)(i), (b) and (c));5

      4. (iv)

         use reasonable endeavours to obtain and compare the relevant data that it needs to carry out useful assessments in respect of the factors set out in (2)(a)(i), (b) and (c), in a manner which is proportionate to the likely member benefits that will result from the IGC assessing the data;5

      5. (v)

         assess the relevant scheme by reference to the scheme comparators based on factors (2)(a)(i), (b) and (c) (to the extent that there is publicly, or readily, available information about the scheme comparators in respect of those factors); and 5

      6. (vi)

         consider whether any of the scheme comparators offer better value for money for relevant policyholders based on factors (2)(a)(i), (b) and (c) (to the extent that there is publicly, or readily, available information about the scheme comparators in respect of those factors); 5

      3
   6. (f)

      as part of the assessment of quality of services in 2(c), the IGC will need to assess whether default investment strategies within those schemes:5

      1. (i)

         are designed and executed in the interests of relevant policyholders; and5

      2. (ii)

         have clear statements of aims and objectives; 5

      3
   7. (g)

      as part of the assessment of quality of services in 2(c), the IGC will need to assess whether the characteristics and net performance of investment strategies are regularly reviewed by the firm to ensure alignment with the interests of relevant policyholders and that the firm takes action to make any necessary changes;5

3. (2A)

   the IGC will assess the ongoing value for money for pathway investors delivered by a pathway investment particularly, though not exclusively, through assessing the three factors in (a) to (c) below, taking into account the specific points in (d) to (g):5

   3
   1. (a)

      the level of charges and costs in particular:5

      3
      1. (i)

         administration charges and any transactions costs borne by pathway investors; and5

         3
      2. (ii)

         any other charges borne by pathway investors and any other costs incurred as a result of managing and investing, and activities in connection with the managing and investing of, the drawdown fund of pathway investors; 5

         3
   2. (b)

      investment performance; and5

      3
   3. (c)

      the quality of services including whether:5

      1. (i)

         the communications are fit for purpose and properly take into account the characteristics, needs and objectives of the pathway investors; and5

      2. (ii)

         core financial transactions are processed promptly and accurately, such as processing contributions, transfers or death benefits;5

      3
   4. (d)

      as part of the ongoing value for money assessment in (2A), the IGC will need to consider whether to assess the pathway investment on an individual basis or on an aggregated basis using cohorts of sufficiently similar pathway investments, or a combination of both, to enable the IGC to produce a value for money assessment that is the most useful for the pathway investors, but which is also appropriate and proportionate in the circumstances;5

      3
   5. (e)

      as part of the ongoing value for money assessment in (2A)(a)(i), (b) and (c), the IGC will need to: 5

      1. (i)

         consider whether individual pathway investments or cohorts of pathway investments, or a combination of both, would be most appropriate to be part of pathway investment comparators taking into account the proportionality and usefulness of each;5

      2. (ii)

         (where it selects cohorts of pathway investments as part of its pathway investment comparators) select sufficiently similar pathway investments that enable the IGC to produce an assessment that is the most useful for the pathway investors;5

      3. (iii)

         select a small number of reasonably comparable pathway investment comparators (including those which could potentially offer better value for money in respect of factors (2A)(a)(i), (b) and (c)); 5

      4. (iv)

         use reasonable endeavours to obtain and compare the relevant data that it needs to carry out useful assessments in respect of the factors set out in (2A)(a)(i), (b) and (c), in a manner which is proportionate to the likely pathway investor benefits that will result from the IGC assessing the data;5

      5. (v)

         assess the pathway investment by reference to the pathway investment comparators based on factors (2A)(a)(i), (b) and (c) (to the extent that there is publicly, or readily, available information about the pathway investment comparators in respect of those factors); and5

      6. (vi)

         consider whether any of the pathway investment comparators offer better value for money for pathway investors based on factors (2A)(a)(i), (b) and (c) (to the extent that there is publicly, or readily, available information about the pathway investment comparators in respect of those factors);5

      3
   6. (f)

      as part of the assessment of quality of services in (2A)(c), the IGC will need to assess whether the pathway investment offered by the firm:5

      1. (i)

         is designed and managed in the interests of pathway investors; and5

      2. (ii)

         has a clear statement of aims and objectives; 5

      3
   7. (g)

      as part of the assessment of quality of services in (2A)(c), the IGC will need to assess whether the characteristics and net performance of the pathway investment are regularly reviewed by the firm to ensure alignment with the interests of pathway investors and that the firm takes action to make any necessary changes;5

4. (2B)

   where a firm has an investment strategy or makes investment decisions which could have a material impact on the relevant policyholders’ or pathway investors’ investment returns, the IGC will consider and report on:3

   1. (a)

      the adequacy and quality of the firm’s policy (if any) in relation to ESG financial considerations;3

   2. (b)

      the adequacy and quality of the firm’s policy (if any) in relation to non-financial matters; and 3

   3. (c)

      how the considerations or matters in (a) and (b) are taken into account in the firm’s investment strategy or investment decision making; and3

   4. (d)

      the adequacy and quality of the firm’s policy (if any) in relation to stewardship;3

5. (2C)

   where the firm does not have a policy in relation to ESG financial considerations, non-financial matters or stewardship, the IGC will in each case consider and report on the firm’s reasons for not having a policy;3

6. (2D)

   where the firm has not already adequately taken into account, in its investment strategy or investment decision making, other financial considerations that pose a particular and significant risk of financial harm to the relevant policyholders or pathway investors, the IGC will also:3

   1. (a)

      consider and report on the adequacy and quality of the firm’s policy (if any) in relation to those other financial considerations, and whether and how those considerations are taken into account in the firm’s investment strategy or investment decision; or3

   2. (b)

      consider and report on the firm’s reasons for not having a policy in relation to those considerations;3

7. (2E)

   the IGC will consider and report on the extent to which the firm has implemented its stated policies in relation to the considerations and matters in (2B), (2C), and, where applicable (2D);3

8. (3)

   in relation to the IGC’s remit of review,3 the IGC will raise with the firm's governing body any concerns it may have:3

   1. (a)

      in relation to any of the matters it has assessed or considered; or3

   2. (b)

      where the IGC is unable to obtain or has difficulties obtaining from the firm the information it requires;3

9. (3A)

   once a decision has been made by a firm to offer a pathway investment, the IGC must raise any concerns under (3):3

   1. (a)

      in good time to give the firm’s governing body a proper opportunity to consider and address the IGC’s concerns, before the pathway investment is offered to retail clients; and3

   2. (b)

      on an ongoing basis in relation to the pathway investment it offers;3

10. (4)

    the IGC will escalate concerns as appropriate where the firm has not, in the IGC's opinion, addressed those concerns satisfactorily or at all;

11. (5)

    the IGC will meet, or otherwise make decisions to discharge its duties, using a quorum of at least three members, with the majority of the quorum being independent;

12. (6)

    the Chair of the IGC will be responsible for the production of an annual report setting out the following, in sufficient detail, taking into account the information needs of consumers5:

    1. (a)

       the IGC's opinion on:3

       1. (i)

          the value for money delivered by a relevant scheme or a pathway investment, particularly against the matters listed under (2) or (2A) and a statement setting out their overall assessment of whether the relevant scheme or pathway investment provides value for money;5 and

          3
       2. (ii)

          the adequacy and quality of the firm’s policies, or reasons for not having policies, in relation to the considerations and matters listed under (2B), (2C) and (if applicable) (2D); 3

    2. (aa)

       the extent to which the firm has implemented its stated policies in relation to the consideration and matters in (2B), (2C) and (if applicable) (2D);3

    3. (ab)

       an explanation of how the IGC carried out their assessment of ongoing value for money. This must include demonstrating how the factors set out in (2)(a) to (c) or (2A)(a) to (c) have been fully and properly considered; 5

    4. (ac)

       the reasons:5

       1. (i)

          for the IGC’s overall assessment of whether the relevant scheme or pathway investment provides value for money as required under (6)(a)(i); 5

       2. (ii)

          (in relation to a relevant scheme only), where the IGC assessed the relevant scheme using cohorts of employer pension arrangements for the purposes of its general assessment in (2)(d) or used cohorts as part of the scheme comparators in (2)(e), why the IGC considers it is appropriate and proportionate to use cohorts and the IGC’s reasons for using the characteristics that it used to select the cohorts;5

       3. (iii)

          (in relation to a relevant scheme only), why the IGC considers that the scheme comparators it selected for the purposes of its assessment under (2)(e) provided a reasonable comparison against the relevant scheme;5

       4. (iv)

          (in relation to a pathway investment only), where the IGC assessed the pathway investment using cohorts of pathway investments for the purposes of its general assessment in (2A)(d) or used cohorts as part of the pathway investment comparators in (2A)(e), why the IGC considers it is appropriate and proportionate to use cohorts of pathway investments and the IGC’s reasons for using the characteristics that it used to select the cohorts; and5

       5. (v)

          (in relation to a pathway investment only) why the IGC considers that the pathway investment comparators it selected for the purposes of its assessment under (2A)(e) provided a reasonable comparison against the pathway investment; 5

    5. (b)

       how the IGC has considered relevant policyholders' or pathway investors’3 interests;

    6. (c)

       any concerns raised by the IGC with the firm's governing body and the response received to those concerns;

    7. (d)

       how the IGC has sufficient expertise, experience and independence to act in relevant policyholders' or pathway investors’3 interests;

    8. (e)

       how each independent member of the IGC, together with confirmation that the IGC considers these members to be independent, has taken into account COBS 19.5.12 G;

    9. (f)

       the arrangements put in place by the firm to ensure that the views of relevant policyholders or pathway investors’3 are directly represented to the IGC; and4

    10. (g)

        4administration charges and transaction costs information complying with the requirements in COBS 19.5.16R;

13. (7)

    4the Chair of the IGC will ensure the annual report is produced by 30 September5 each year, in respect of the previous calendar year;

14. (8)

    4the IGC will ensure the publication of administration charges and transaction costs information complying with the requirements in COBS 19.5.13R;

15. (9)

    4the IGC will ensure that all members of each relevant scheme are provided with an annual communication complying with the requirements in COBS 19.5.17R;

16. (10)

    4the IGC will make available the annual communication referred to in (9), on request, to:

    1. (a)

       relevant scheme members’ spouses or civil partners; and

    2. (b)

       persons within the application of the relevant scheme and qualifying or prospectively qualifying for benefits under the relevant scheme;5

17. (11)

    4the IGC will ensure that information is communicated under this rule in a manner that pays due regard to the purposes for which relevant policyholders might reasonably use the information; and5

18. (12)

    the IGC will retain copies of any evidence used in their assessment of ongoing value for money for a minimum of six years.5

A firm must:

1. (1)

   take reasonable steps to ensure that the IGC acts and continues to act in accordance with its terms of reference;

2. (2)

   take reasonable steps to provide the IGC with all information reasonably requested by the IGC in good time3 for the purposes of carrying out its role;

3. (3)

   provide the IGC with sufficient resources as are reasonably necessary to allow it to carry out its role independently;

4. (4)

   have arrangements to ensure that the views of relevant policyholders or pathway investors3 can be directly represented to the IGC;

5. (5)

   take reasonable steps to address any concerns raised by the IGC under its terms of reference;

6. (5A)

   for any pathway investment, take reasonable steps to address any concerns raised by the IGC about the matters in COBS 19.5.5R(3) and (3A):3

   1. (a)

      before the firm offers the pathway investment, and3

   2. (b)

      promptly, for any pathway investment it already offers.3

7. (6)

   provide written reasons to the IGC as to why it has decided to depart in any material way from any advice or recommendations made by the IGC to address any concerns it has raised;

8. (7)

   take all necessary steps to facilitate the escalation of concerns by the IGC under COBS 19.5.5R (4) and COBS 19.5.6G (5); 4

9. (8)

   make available the IGC’s terms of reference and the three most recent annual reports, in a way appearing to the firm to be best calculated to bring them to the attention of relevant policyholders and their employers or to the attention of pathway investors3; and

   4
10. (9)

    4provide each relevant scheme’s IGC with administration charges and transaction costs information, setting out the costs and charges for each default arrangement and each alternative fund option that the member is able to select.

1. (1)

   A firm must take reasonable steps to ensure that the IGC has sufficient collective expertise and experience to be able to make judgements on the matters in the IGC’s remit of review3.

2. (2)

   A firm must recruit independent IGC members through an open and transparent recruitment process.

3. (3)

   A firm must appoint members to the IGC so that:

   1. (a)

      the IGC consists of at least five members, including an independent Chair and a majority of independent members;

   2. (b)

      IGC members are bound by appropriate contracts which reflect the terms of reference in COBS 19.5.5 R, and on such terms as to secure the independence of independent members;

   3. (c)

      independent IGC members who are individuals are appointed for fixed terms of no longer than five years, with a cumulative maximum duration of ten years;

   4. (d)

      individuals acting as the representative of an independent corporate member are appointed to the IGC for a maximum duration of ten years;

   5. (e)

      independent IGC members who are individuals, including those representing independent corporate members, are not eligible for reappointment to the IGC until five years have elapsed, after having served on the firm's IGC for the maximum duration of ten years;

   6. (f)

      appointments to the IGC are managed to maintain continuity in terms of expertise and experience of the IGC.

The firm, in appointing independent IGC members, must determine whether such a member is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, that member’s judgement.

4The administration charges and transactions costs information referred to in COBS 19.5.5R(8) must, in relation to each relevant scheme:

1. (1)

   be published by 30 September5 each year, in respect of the previous calendar year;

2. (2)

   be available for free on a publicly accessible website;

3. (3)

   include the costs and charges for each default arrangement and each alternative fund option that a member is able to select; and

4. (4)

   include an illustration of the compounding effect of the administration charges and transaction costs, based on either the assumptions contained in COBS 13 Annex 2 or those in Version 4.2 of the Actuarial Standard Technical Memorandum (AS TM1) produced by the Financial Reporting Council, for a representative range of fund options that a member is able to select.

4Regarding transaction costs:

1. (1)

   the requirements in COBS 19.5.13R(3) and COBS 19.5.16R(1) apply to the extent that such information is available to the IGC; and

2. (2)

   the published information should include a warning giving brief details of any unavailable information that the IGC is aware of.

4The administration charges and transaction costs information in the IGC’s annual report referred to in COBS 19.5.5R(6)(g) must, in relation to each relevant scheme:

1. (1)

   at a minimum, include the costs and charges for each default arrangement;

2. (2)

   explain how a relevant scheme member can access the costs and charges information for each default arrangement and each alternative fund option that a member is able to select, including providing a link to the website required by COBS 19.5.13R(2); and

3. (3)

   be published alongside any information in the IGC’s annual report relating to the relevant scheme’s default investment strategy and value for members.

4The annual communication referred to in COBS 19.5.5R(9) must:

1. (1)

   include a brief description of the most recent transaction costs and administration charges information that has been published in accordance with COBS 19.5.13R, and an explanation of how that information is relevant to the relevant scheme member; and

2. (2)

   explain how a relevant scheme member can access the information referred to in (1), including providing a link to the website required by COBS 19.5.13R(2).