Terms of reference

Application

COBS 19.5.1R

This section applies to:

(1) a firm which operates a relevant scheme in which there are at least two relevant policyholders; or

(2) a firm which offers or has decided to offer a pathway investment.

Definitions

COBS 19.5.1AR

In this section:

(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;

(1AA) “investment performance” means the investment performance of the:

(a) pension savings of relevant policyholders; or

(b) the drawdown fund of pathway investors;

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

(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:

(a) manufactured by F1; or

(b) manufactured by another firm (F2);

(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:

(a) are individual pathway investments; or

(b) are cohorts of similar pathway investments;

(3) “pathway firm” means a firm which offers a pathway investment;

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

(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:

(a) are individual employer pension arrangements; or

(b) are cohorts of similar employer pension arrangements;

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

(a) the communications issued to relevant policyholders or pathway investors; and

(b) the administration of the relevant scheme or pathway investment;

(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;

(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:

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

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

(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).

Purpose

COBS 19.5.1BG

The purpose of this section is:

(1) to ensure that relevant policyholders and pathway investors benefit from independent review of the investments they invest in through the establishment of an IGC or (where appropriate) a governance advisory arrangement.

The specific objectives of the IGC or governance advisory arrangement are to:

(a) assess whether a firm provides value for money for relevant policyholders or pathway investors;

(b) provide an independent consideration of a firm’s policies on:

(i) ESG financial considerations;

(ii) non-financial matters;

(iii) stewardship; and

(iv) where applicable, other financial considerations to the extent that they pose a particular and significant risk of financial harm to the relevant policyholders or pathway investors.

Requirement to establish an IGC

COBS 19.5.2R

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

(1) Firm A has established a governance advisory arrangement in accordance with COBS 19.5.3R; or

(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.

Governance advisory arrangements

COBS 19.5.3R

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

(a) for a relevant scheme operator, the size, complexity and nature of the relevant scheme it operates; or

(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.

(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) 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.

COBS 19.5.4G

(1) Firms with large or complex relevant schemes should establish an IGC. For the purposes of this section, a firm may determine whether it has large relevant schemes by reference to:

(a) the number of relevant policyholders in relevant schemes;

(b) the funds under management in relevant schemes; and

(c) the number of employers contributing to relevant schemes.

(2) Examples of features that might indicate complex schemes include:

(a) schemes that are operated on multiple information technology systems;

(b) schemes that have multiple charging structures;

(c) schemes that offer a with-profits fund; and

(d) the firm offers relevant policyholders access to investment funds it operates or which are operated by an entity with the same ownership.

(3) A pathway firm that has, or expects to have, a large take up of a pathway investment should establish an IGC.

(4) A firm may determine whether it has, or expects to have, a large take up of a pathway investment by reference to:

(a) the number of retail clients invested, or expected to invest, in a pathway investment offered by the firm; or

(b) the amount of the firm’s pathway investors’ funds under, or expected to be under management in a pathway investment offered by the firm.

(5) Examples of features that might indicate a complex pathway investment include:

(a) a pathway investment that has multiple charging structures; or

(b) a pathway investment that uses a sophisticated or complex investment strategy, which may include investments in a with-profits fund.

(6) Having regard to the nature of the pathway investment, a firm may consider that it is more appropriate to use a governance advisory arrangement where the pathway investment it offers is manufactured by another firm.

(7) If a firm manufactures its own pathway investment, it may be more appropriate for the firm to establish an IGC.

(8) A firm should consider establishing an IGC instead of a governance advisory arrangement if the firm both operates a relevant scheme and also manufactures its own pathway investment.

Terms of reference for an IGC

COBS 19.5.5R

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

(1) the IGC will act solely in the interests of:

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

(b) pathway investors;

(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)::

(a) the level of charges and costs, in particular:

(i) administration charges and any transactions costs borne by relevant policyholders; and

(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;

(b) investment performance; and

(c) the quality of services including whether:

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

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

(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;

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

(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;

(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;

(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));

(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;

(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

(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);

(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:

(i) are designed and executed in the interests of relevant policyholders; and

(ii) have clear statements of aims and objectives;

(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;

(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):

(a) the level of charges and costs in particular:

(i) administration charges and any transactions costs borne by pathway investors; and

(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;

(b) investment performance; and

(c) the quality of services including whether:

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

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

(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;

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

(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;

(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;

(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));

(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;

(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); and

(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);

(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:

(i) is designed and managed in the interests of pathway investors; and

(ii) has a clear statement of aims and objectives;

(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;

(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:

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

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

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

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

(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;

(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:

(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; or

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

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

(a) in relation to any of the matters it has assessed or considered; or

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

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

(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; and

(b) on an ongoing basis in relation to the pathway investment it offers;

(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;

(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;

(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 consumers:

(a) the IGC's opinion on:

(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; and

(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);

(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);

(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;

(ac) the reasons:

(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);

(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;

(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;

(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; and

(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;

(b) how the IGC has considered relevant policyholders' or pathway investors’ interests;

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

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

(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;

(f) the arrangements put in place by the firm to ensure that the views of relevant policyholders or pathway investors’ are directly represented to the IGC; and

(g) administration charges and transaction costs information complying with the requirements in COBS 19.5.16R;

(7) the Chair of the IGC will ensure the annual report is produced by 30 September each year, in respect of the previous calendar year;

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

(9) the 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;

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

(a) relevant scheme members’ spouses or civil partners; and

(b) persons within the application of the relevant scheme and qualifying or prospectively qualifying for benefits under the relevant scheme;

(11) the 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; and

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

Value for money assessment

COBS 19.5.5AG

(1) In the context of the IGC’s assessment of ongoing value for money for relevant policyholders or pathway investors under COBS 19.5.5R(2) or COBS 19.5.5R(2A):

(a) the administration charges and transaction costs borne by relevant policyholders or pathway investors are likely to represent value for money when the combination of the charges and costs, and the investment performance and services are appropriate:

(i) for the relevant policyholders or pathway investors, and

(ii) when compared to other reasonably comparable options on the market.

(b) As part of the IGC’s assessment under (1)(a)(i) regarding what is appropriate for relevant policyholders, the IGC should consider the size of the employer and the size and demographic of the membership of the relevant scheme.

(c) The IGC should not use a firm’s compliance with the limits on administration charges (COBS 19.6.6R), of itself, as evidence of value for money.

(d) Where the limits on administration charges in COBS 19.6.6R do not apply, the IGC should not use the fact that a firm keeps its administration charges at or below 1%, of itself, as evidence of value for money.

(2) The IGC should take into account the considerations in (3), as part of the IGC’s:

(a) decision referred to in COBS 19.5.5R(2)(d) about whether to carry out its ongoing value for money assessment of the relevant scheme by assessing the employer pension arrangements on an individual or cohort basis; or

(b) selection of scheme comparators under COBS 19.5.5R(2)(e)(i) to (iii).

(3) The considerations referred to in (2) are:

(a) the size and demographic of the membership of the individual employer pension arrangements and/or any proposed cohorts;

(b) (where cohorts are proposed), any other characteristics that it would be appropriate and proportionate for the IGC to use, in the particular circumstances of the relevant scheme, as part of its cohort selection criteria; and

(c) (if the IGC has used cohorts of employer pension arrangements in any part of its ongoing value for money assessment under COBS 19.5.5R(2)) whether it would be appropriate and proportionate also to assess any particular employer pension arrangements within the cohorts on an individual basis in order to be able to carry out the most useful assessment under COBS 19.5.5R(2).

(4) The IGC should take into account the considerations in (5), as part of the IGC’s:

(a) decision referred to in COBS 19.5.5R(2A)(d) about whether to carry out its ongoing value for money assessment of the pathway investment by assessing the pathway investment on an individual or cohort basis; or

(b) selection of pathway investment comparators under COBS 19.5.5R(2A)(e)(i) to (iii).

(5) The considerations referred to in (4) are:

(a) (where cohorts are proposed), any characteristics that it would be appropriate and proportionate for the IGC to use, in the particular circumstances of the pathway investment, as part of its cohort selection criteria; and

(b) (if the IGC has used cohorts of pathway investments in any part of its ongoing value for money assessment under COBS 19.5.5R(2A)) whether it would be appropriate and proportionate to also assess any particular pathway investments within the cohorts on an individual basis in order to be able to carry out the most useful assessment under COBS 19.5.5R(2A).

(6) As part of the IGC’s selection of scheme comparators or investment pathways comparators under COBS 19.5.5R(2)(e)(i) to (iii) or COBS 19.5.5R(2A)(e)(i) to (iii), the IGC will need to include scheme comparators or pathway investment comparators that potentially offer better value for money in respect of the factors set out in COBS 19.5.5R(2)(a)(i), (b) and (c) or COBS 19.5.5R(2A)(a)(i), (b) and (c) (based on whatever information is publicly, or readily, available and is relevant to those factors).

(7) There is no expectation by the FCA that the IGC would carry out a comparison of all the comparable employer pension arrangements or all of the comparable pathway investments for the purposes of COBS 19.5.5R(2)(e) or COBS 19.5.5R(2A)(e).

Interests of relevant policyholders or pathway investors and consideration of adequacy and quality of a policy

COBS 19.5.6G

(1) An IGC is expected to act in the interests of relevant policyholders or pathway investors both individually and collectively. Where there is the potential for conflict between individual and collective interests, the IGC should manage this conflict effectively. An IGC is not expected to deal directly with complaints from individual policyholders or pathway investors.

(2) The primary focus of an IGC should be the interests of relevant policyholders or pathway investors in accordance with COBS 19.5.5R(1). If a firm asks an IGC also to consider the interests of other members or clients, the firm should provide additional resources and support to the IGC such that the IGC's ability to act in the interests of relevant policyholders or pathway investors is not compromised.

(3) An IGC should assess whether all the investment choices available to relevant policyholders or pathway investors, including default options, are regularly reviewed to ensure alignment with the interests of relevant policyholders or pathway investors.

(4) Where an IGC is unable to obtain from a firm, and ultimately from any other person providing relevant services, the information it requires to assess or to consider and report on the matters in the IGC’s remit of review, the IGC should explain in the annual report why it has been unable to obtain the information and how it will take steps to be granted access to that information in the future.

(5A) In addition to the ability of the IGC to escalate a concern about value for money under (5), if the IGC finds that:

(a) any of the scheme comparators offer better value for money for relevant policyholders than the relevant scheme based on the factors set out in COBS 19.5.5R(2)(a)(i), (b) and (c); or

(b) any of the investment pathway comparators offer value for money for pathway investors than the pathway investment based on the factors set out in COBS 19.5.5R(2A) (a)(i), (b) and (c),

the IGC should bring this matter, together with an explanation and relevant evidence, to the attention of the firm’s governing body.

(5AA) If the IGC is not satisfied with the response of the firm’s governing body to the concerns it has raised under (5A) and the IGC considers that informing the relevant employer or employers could be of material utility to the employers or the members regarding the IGC’s concern about value for money under (5), the IGC should inform the relevant employer or employers directly.(5AAA)

In (5AA), an example of circumstances where an IGC may consider that informing the employer would be unlikely to be of material utility is where there are solely deferred members in any affected employer pension arrangement and the employer does not have the ability to effect a transfer of the deferred benefits from the employer pension arrangement to a new arrangement.

(5) If, having raised concerns with the firm's governing body about the matters in the IGC’s remit of review, the IGC is not satisfied with the response of the firm's governing body, the IGC Chair may escalate concerns to the FCA if the IGC thinks that would be appropriate. The IGC may also alert relevant policyholders or pathway investors and employers and make its concerns public.

(6) The IGC Chair should raise with the firm's governing body any concerns that the IGC has about the information or resources that the firm provides, or arrangements that the firm puts in place to ensure that the views of relevant policyholders or pathway investors are directly represented to the IGC. If the IGC is not satisfied with the response of the firm's governing body, the IGC Chair may escalate its concerns to the FCA, if appropriate. The IGC may also make its concerns public.

(7) The IGC should make public the names of those members of the IGC who are employees of the provider firm, unless there are compelling reasons not to do so. The IGC should consult employee members as to whether there are such reasons.

(8) The IGC need not consider and report on ESG financial considerations or non-financial matters or stewardship or other financial considerations as set out in COBS 19.5.5R(2B) and COBS 19.5.5R(2D) if the firm does not have an investment strategy or make investment decisions which could have a material impact on the relevant policyholders’ or pathway investors’ investment returns.

(9) The IGC should only consider and report on other financial considerations as set out in COBS 19.5.5R(2D) where it considers that:

(a) they are likely to pose a particular and significant risk of financial harm to the relevant policyholders or pathway investors; and

(b) the firm has not already adequately taken those other financial considerations into account in its investment strategy or investment decision making.

(10) When an IGC is considering the adequacy and quality of a firm’s policies regarding ESG financial considerations, non-financial matters, stewardship or other financial considerations, the IGC should form a view as to whether:

(a) a policy sufficiently characterises the relevant risks or opportunities;

(b) it considers that a policy seeks to appropriately mitigate those risks and take advantage of those opportunities;

(c) a firm’s processes have been designed to properly take into account those risks or opportunities;

(d) a policy is appropriate in the context of the expected duration of the investment; and

(e) a policy is appropriate in the context of the main characteristics of the actual or expected relevant policyholders or pathway investors.

(11) Where an IGC is considering whether a firm has adequately taken other financial considerations into account for the purposes of COBS 19.5.5R(2D), it should also take into account the factors in COBS 19.5.6(10)G, whether or not contained in a policy.

Duties of firms in relation to an IGC

COBS 19.5.7R

A firm must:

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

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

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

(4) have arrangements to ensure that the views of relevant policyholders or pathway investors can be directly represented to the IGC;

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

(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):

(a) before the firm offers the pathway investment, and

(b) promptly, for any pathway investment it already offers.

(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;

(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);

(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 investors; and

(9) provide 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.

COBS 19.5.8G

(1) A firm should consider allocating responsibility for the management of the relationship between the firm and its IGC to a person at the firm holding an FCA significant-influence function or designated senior management function.

(2) A firm should fund independent advice for the IGC if this is necessary and proportionate.

(3) A firm should not unreasonably withhold from the IGC information that would enable the IGC to carry out its duties in the IGC’s remit of review.

(3A) A firm should provide the IGC with sufficient support and resources so that the IGC is properly able to carry out its duties in the IGC’s remit of review.

(4) A firm should have arrangements for sharing confidential and commercially sensitive information with the IGC.

(5) A firm should use best endeavours to obtain, and should provide the IGC with, information on the costs incurred as a result of managing and investing, and activities in connection with the managing and investing of, the assets of a relevant scheme or which could impact a pathway investment, including transaction costs. Information about costs and charges more broadly should also be provided, so that the IGC can properly assess the value for money of a relevant scheme or a pathway investment and the funds held within these.

(6) If a firm asks an IGC to take on responsibilities in addition to those in COBS 19.5.5 R, the firm should provide additional resources and support to the IGC such that its ability to act within its terms of reference in COBS 19.5.5 R is not compromised.

(7) A firm should provide secretarial and other administrative support to the IGC. The nature of the support, including how it is provided and by whom, should not conflict with the IGC's ability to act independently of the firm.

(8) A firm can make the IGC’s terms of reference and the IGC’s three most recent annual reports available in a way designed to bring them to relevant policyholders’ and their employers’ attention or to the attention of pathway investors by placing them in an appropriately prominent and relevant position on its website, and by providing them on request to relevant policyholders and their employers or to pathway investors.

Appointment of IGC members

COBS 19.5.9R

(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 review.

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

(3) A firm must appoint members to the IGC so that:

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

(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;

(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;

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

(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;

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

COBS 19.5.10G

(1) The effect of COBS 19.5.9R (3)(b) is that employees of the firm who serve on an IGC should be subject to appropriate contractual terms so that, when acting in the capacity of an IGC member, they are free to act within the terms of reference of the IGC without conflict with other terms of their employment. In particular, when acting as an IGC member, an employee will be expected to act solely in the interests of relevant policyholders or pathway investors and should be able to do so without breaching any terms of their employment contract.

(2) An individual may serve on more than one IGC.

(3) A firm should replace any vacancies that arise within IGCs as soon as possible and, in any event, within six months.

(4) A firm should involve the IGC Chair in the appointment and removal of other members, both independent members and employees of the firm.

(5) A firm should consider indemnifying IGC members against any liabilities incurred while fulfilling their duties as IGC members.

IGC members who are independent

COBS 19.5.11R

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.

COBS 19.5.12G

(1) An IGC member is unlikely to be considered independent if any of the following circumstances exist:

(a) the individual is an employee of the firm or of a company within the firm's group or paid by them for any role other than as an IGC member, including participating in the firm's share option or performance-related pay scheme;

(b) the individual has been an employee of the firm or of another company within the firm's group within the five years preceding his appointment to the IGC;

(c) the individual has, or had within the three years preceding his appointment, a material business relationship of any description with the firm or with another company within the firm's group, either directly or indirectly.

(2) A firm may appoint a body corporate to an IGC, including as Chair. The corporate member should notify the firm of the individual who will act as the member's representative on the IGC. A firm should consider the circumstances of a corporate IGC member and any representative of the corporate member with the objective of ensuring that any potential conflicts of interest are managed effectively so that they do not affect the corporate IGC member's ability to represent the interests of relevant policyholders or pathway investors.

(3) Should the firm, or another company within the firm's group, operate a master trust, there may be benefits in a trustee of such a master trust also being an IGC member. If such circumstances exist, an individual or a corporate trustee may be suitable to be an independent IGC member, notwithstanding the relationship with the firm.

(4) A firm should review on a regular basis whether its independent IGC members continue to be independent and take appropriate action if it considers that they are not.

Publication and disclosure of costs and charges by IGCs

COBS 19.5.13R

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

(1) be published by 30 September each year, in respect of the previous calendar year;

(2) be available for free on a publicly accessible website;

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

(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.

COBS 19.5.14R

Regarding transaction costs:

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

COBS 19.5.15G

An example of the type of illustration referred to in COBS 19.5.13R(4) is shown below. The assumptions in the notes should reflect the actual assumptions used.

Projected pension pot in today’s money
Fund choice
	Default Arrangement		Fund A		Fund B		Fund C
Years<	Before charges + costs deducted	After all charges + costs deducted	Before charges + costs deducted	After all charges + costs deducted	Before charges + costs deducted	After all charges + costs deducted	Before charges + costs deducted	After all charges + costs deducted
1
3
5
10
15
20
25
30
35
40

Example notes:

1. Projected pension pot values are shown in today’s terms, and do not need to be reduced further for the effect of future inflation.

2. The starting pot size is assumed to be £10,000.

3. Inflation is assumed to be 2.5% each year.

4. Contributions are assumed from age 22 to 68 and increase in line with assumed earnings inflation of 2.5% to 4% each year.

5. Values shown are estimates and are not guaranteed.

6. The projected growth rate for each fund are as follows:

1. Default fund: 2.5% above inflation

2. Fund A: 2% above inflation

3. Fund B: 1% above inflation

4. Fund C: 1% below inflation

COBS 19.5.16R

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

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

COBS 19.5.17R

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

(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) 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).

COBS 19.5.18G

The annual communication may be included with any other annual communication from the operator to the member of the relevant scheme.

COBS 19.5.19G

The annual communication provided to a relevant scheme member may also include the particular transaction costs and administration charges that have been incurred by that member.

COBS 19.5.20G

In communicating information in compliance with COBS 19.5.5R(11), the IGC should ensure, for example, that it is straightforward for a relevant scheme member to compare the transaction costs and administration charges between fund options that are available for them to select.