The Pensions Regulator (TPR) has recently published the final version of the long awaited General Code of Practice (the General Code). We recently published an article setting out the main features of the General Code and referring to some of the key changes made to the earlier draft.
We focus on some of the key highlights from the General Code in this article and any practical action points for trustees over the next period. We are delighted to welcome comments from Lukshmi Selvarajah of Capital Cranfield, who acts as an Independent Professional Trustee on a number of schemes.
Trustee boards are now facing new challenges in ensuring their schemes meet the governance requirements set out in the General Code. We summarise some of the key highlights and action points for trustees below to assist in developing a ‘governance roadmap’ in complying with the General Code, including the experience ‘on the ground’ from Capital Cranfield.
As a reminder, the General Code consists of 51 modules under five key headings: (i) The governing body; (ii) Funding and investment; (iii) Administration; (iv) Communications and disclosure; and (v) Reporting to TPR.
The ‘governing body’ essentially captures anyone responsible for running a scheme. This includes the trustees of an occupational pension scheme, or in a public service scheme, the scheme manager. This article considers the various duties and obligations on trustees of occupational pension schemes.
We have provided a shortlist below setting out some of the key highlights from the General Code and recommended action points for trustees:
- Effective system of governance (ESOG)
This is a fundamental requirement of the General Code, arising from the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018. The ESOG must be proportionate to the size, nature, scale and complexity of the activities of the scheme.
In order to ensure the ESOG meets TPR’s requirements, we recommend trustees:
- review their scheme’s governance system against the ESOG requirements;
- identify and fill in gaps;
- record the above; and
- where the scheme has 100+ members, complete an annual Own Risk Assessment (ORA) reviewing the working of the ESOG and how risks are managed.
The General Code requires each element of the ESOG to be reviewed at least every three years.
The ESOG applies to all sizes of scheme. In particular, TPR states that the ESOG must be “proportionate to the size, nature, scale, and complexity of the activities of the scheme“. Clearly, larger schemes may be in better shape to invest in the systems and efficiencies needed to comply in this area, which may include investing in experienced specialists and committees to ensure an effective ESOG is in place for the scheme.
Concerns have been raised as to the applicability of the General Code to smaller schemes (i.e. those with less than 100 members). Responding to these concerns, TPR has emphasised the need for reasonableness and proportionality – i.e. what is a reasonable and proportionate approach will differ depending on the size of scheme and its overall governance framework. There is an expectation TPR will provide further guidance on the applicability of the General Code to small schemes in due course.
- Own risk assessment (ORA)
The legislative requirements around ORAs are such that trustees will need to invest significant time and resources in preparing a document which meets TPR’s expectations and governance requirements. That said, TPR indicates that much of the content required for producing the ORA should already be a part of schemes’ governing processes, and trustees are permitted to re-use existing governance material where appropriate. TPR has indicated that the ORA will involve significant work for poorly run schemes, but will be much more straightforward for any well run scheme.
Following consultation, TPR reviewed the timescales for an ORA to be prepared. These timescales are now as follows:
- Within 12 months beginning with the last day of the first scheme year that begins after TPR’s new Code of Practice comes into force (expected 27 March 2024) (the first limb); or
- If later, within 15 months beginning with the date on which the trustees are next required to obtain an actuarial valuation or by the date on which the trustees are next required to prepare an annual chair statement (the second limb).
Clearly, there is some flexibility under the second limb above, though we recommend trustees follow the approach of least risk and aim for preparing their first ORA in accordance with the first limb above. As previously reported, subsequent ORAs must be completed on a triennial basis (i.e. at least every three years). Despite these longer timescales, TPR expects the ORA to be reviewed by trustees on an ongoing basis.
By way of reminder, only schemes with 100 + members must produce an ORA, but other schemes may wish to do so as good practice and as a way of demonstrating good governance practices.
- Other key aspects of the General Code
- Remuneration policy – (schemes with 100 + members, other schemes as good practice) – TPR has clarified that this policy should only cover those costs that the governing body is responsible for. TPR no longer has an expectation for the policy to be published.
- Policy on appointment of advisers and service providers – (schemes with 100 + members, other schemes as good practice) – TPR have extended the review period of existing service providers from one year to three years, in order to avoid a ‘revolving door’ approach rather than a greater emphasis on driving forward improvements which ultimately impact member experience.
- Greater emphasis on diversity and inclusion – TPR is increasingly asking trustees to consider the overall demographics in relation to scheme members, including their salary profile and in taking into account the types of investments scheme members may want or need.
Before embarking on any of the detailed requirements of the General Code, we recommend trustees conduct a ‘gap analysis’ against the scheme’s governance framework, including any existing policies and procedures in order to identify any particular areas of compliance or non-compliance where additional focus is required.
The view from Capital Cranfield – What is the impact of the General Code and what practical steps can trustees take in response?
“At first glance, the General Code’s long length, requirements and timescales can be very overwhelming for Trustees. But most well-run Trustee Boards have already made progress and are well on the way to meeting the Code’s obligations.
For those who haven’t started yet, planning ahead now is essential. With 12 months to comply with the Code, Trustee Boards have ample time to plan how they will implement the Code – but only if they start planning soon.
Trustee Boards need to consider a balanced approach to implementation and build on the governance processes they already have in place. In my own experience, most pension schemes’ advisors are building template policies, ORA frameworks, and risk management tools to help schemes comply with the Code – rather than re-inventing the wheel.
The Code heavily emphasises the need to be proportionate, with the word mentioned as many as 30 times. This is very helpful for my smaller schemes, and schemes with limited budgets, enabling them to invest sensibly to meet the Code’s requirements, improve governance and thereby create better member outcomes.”
With additional comments from Lukshmi Selvarajah, Capital Cranfield