Joanne Tibbott
Partner
Article
12
The Pensions Regulator has published a new draft code of practice to replace 10 of the 15 current codes. The new code is expected to come into force this summer. Here, we take a look at what the new code means in practice for trustees, what is new and what trustees should be doing now to comply
TPR is in the process of considering the c.10,000 responses it received in its consultation on the Code. Consequently, TPR has said that it does not expect to lay the Code in Parliament before Spring 2022 and it is unlikely to become effective before Summer 2022.
The Code will replace 10 of the 15 current codes of practice with 51 modules in 5 areas:
Under section 249A of the Pensions Act 2004, trustees must establish and operate "an effective system of governance, including internal controls" (an ESOG). The Code sets out for the first time what TPR expects an ESOG to look like.
In addition, trustees of schemes with 100 or more members should also carry out and document an "own risk assessment" (ORA) of their ESOG. The ORA is an assessment of how well governance systems are working and the way potential risks are managed. TPR expects the ORA will be a substantial process and it must be completed within 12 months from the date the Code is published by TPR. We look at ESOGs and ORAs in more detail below.
You can also expect to hear a lot about "governing bodies". TPR has used the term "governing body" throughout the Code as a term to describe the governance structure of all schemes to which the Code applies.
The Code also contains new sections on cyber security, stewardship and climate change.
As with the current codes of practice, the Code will not be a statement of law, but will set out expectations for conduct and practice. Therefore, while there will be no specific penalty for failing to follow the Code, TPR could rely on it in legal proceedings as evidence that a requirement has not been met or when considering whether to issue an improvement or compliance notice.
The catalyst for the Code was the introduction of the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018. These regulations bring elements of the European Union's IORP II directive into UK law and require TPR to rewrite or amend its existing codes of practice.
Also, TPR has said that some of the existing codes of practice are out of date and there is duplication of content between codes and guidance. In addition, interaction between the 15 codes and related guidance is not always easy to navigate.
The Code breaks down themes from the existing codes to form shorter, topic-focused modules. Each module sets out TPR expectations in relation to a topic.
Under section 249A of the Pensions Act 2004, with some limited exceptions, trustees of an occupational pension scheme must establish and operate "an effective system of governance including internal controls". The system of governance must be proportionate to the size, nature, scale and complexity of the scheme.
The Code provides detail on how trustees can meet this obligation. It states that the ESOG must:
The Code states that a system of governance will include anything that is part of the operation of a pension scheme. An ESOG should include processes and procedures to ensure compliance with the following modules in the Code: management of activities, organisational structure, investment matters and communications and disclosure.
Generally, each element of an ESOG should be reviewed at least every three years although it is not necessary for all elements of an ESOG to be reviewed at the same time.
Governing bodies of schemes with 100 or more members must carry out and document an ORA of their ESOG within 12 months of the Code coming into force. The ORA is an assessment of how well governance systems are working and the way potential risks are managed, and builds on the risk assessments that most schemes already carry out on a regular basis. It must be in writing, signed by the chair of trustees and made available to scheme members.
Each subsequent ORA should be carried out and documented within 12 months of the last. It should also be reviewed whenever there is a material change in the risks facing the scheme or its governance processes.
The Code sets out in detail what the ORA should cover. In summary, it should cover:
The ORA should also consider the effectiveness of and risks arising from each of the following elements: the policies for the governing bodies, risk management policies, investment, scheme administration and payment of benefits.
Unsurprisingly, the ORA has received the greatest interest from the pensions industry. Concern was expressed in the consultation about the work it will involve, the timeframe, what the finished product will look like and the burden it will place on smaller schemes. TPR is considering this feedback and has said it will continue to work through the responses to identify possible changes or guidance requirements, particularly for smaller schemes.
TPR expects schemes with 100 members or more to have a remuneration policy in place, setting out the levels and means for remunerating those undertaking activities in relation to the scheme paid for by the governing body and/or sponsoring employer. The Code sets out TPR's expectations in this area (although it will be interesting to see what additional guidance is provided for trustees to assist with compliance, given the potential sensitivities around such a policy):
Although there may be changes in the final version of the Code, trustees should start to prepare now in the following ways:
We hope that you find this summary and analysis helpful. If you have any queries, please contact your usual contact at Gowling WLG or the authors, Joanne, Alison or Stephanie.
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