The Pensions Regulator’s Single Code of Practice
The Pensions Regulator’s (‘TPR’) new single Code of Practice (the ‘Code’) is expected to be implemented in mid-2022. It will consolidate 10 of the 15 existing Codes and also include the requirements of IORP II as reflected in the 2018 Governance Regulations. The Code introduces new governance responsibilities for trustees of both DB and DC pension schemes. In this article, Rachika and Katie will explore five actions you can take now to be prepared for the new Code:
1. Familiarise yourself with the draft Code
The draft Code is a lengthy document, but has been broken down into small, manageable modules. Each module is well signposted to refer back to. We would really recommend reading through it, particularly the sections focusing on new requirements such as the policies and procedures required under the effective system of governance and preparation of the annual own risk assessment. Click here to see a summary of the requirements.
2. Consider receiving some training
LCP is well-placed to provide training on the draft Code and TPR’s expectations and how these might apply proportionately to your scheme.
3. Review your scheme’s governance framework against the Effective System of Governance (“ESOG”) requirements and identify any gaps
An ESOG is required for schemes with more than 100 members. Your ESOG framework will include having processes and procedures in place relating to how the governing body meets and makes decisions, how advisers are used, how conflicts are managed, investment matters, and how you communicate with members.
Many schemes will have a robust governance framework in place already, but there are some new requirements that you may not yet be meeting. For example, schemes will be required to have a remuneration policy and a policy for the appointment, management and review of advisers. You may find it helpful to use LCP’s ESOG service to identify any gaps that you will have to meet.
4. Decide who will undertake the new Functions introduced by the Code
The Code has introduced three new Functions – Risk Management, Internal Audit and Actuarial (see below). We expect some schemes will already be carrying out a lot of the actions that these new Functions are responsible for, though they might not currently be defined in the same way.
5. Consider who will complete the Own Risk Assessment (“ORA”)
The ORA is expected to be a significant new undertaking for most pension schemes. It is an examination of how well the effective system of governance is working and how any potential risks are being mitigated. The first ORA has to be completed within 12 months of the Code being published. It’s helpful to start considering who will assist with complying with the ESOG and preparing the scheme’s first ORA and subsequent annual assessments and making sure this work is factored into the trustee’s business plans and budgets. It may be that your scheme secretary or one of your other advisers are well-placed to support you with this work.
Three new functions
Trustees must also establish the new Functions introduced in the Code:
The Risk Management Function This may be a sub-committee or an independent body, to which the governing body delegates responsibility for identifying, evaluating, monitoring and reporting on key risks and internal controls.
The Internal Audit Function This Function will be responsible for independently evaluating the adequacy and effectiveness of the system of governance. This is different and wider in scope to the annual statutory audit and includes non-financial processes and controls. This Function may, for example, be carried out by the Sponsor’s in-house internal audit team, an outsourced provider, or a third-party audit firm.
The Actuarial Function This is simply the Scheme Actuary role for DB schemes.
Having a defined and robust governance framework for your scheme is fundamental to making good decisions and achieving better outcomes for your members. It puts your scheme ahead of the pack when it comes to dealing with the unexpected and taking advantage of market opportunities. We welcome the overall aim of the Code and encourage trustees to embrace the new requirements proportionately and in a way that enhances how they operate.