Does the new general code have the teeth to drive up standards?

While pensions experts have broadly praised the Pensions Regulator (TPR)’s long-awaited new general code, which was laid in Parliament this week, one adviser questioned whether it has the teeth to drive up standards among poorly managed schemes.

Ian Bell, head of pensions for RSM UK, said: “The new code has been a long time coming, but its impact will be somewhat diluted, as compliance with it is entirely voluntary. Without any mandatory reporting or proactive monitoring of the trustees’ ORA [Own Risk Assessment], there will be no motivation for poorly managed schemes to improve their system of governance. 

“If the regulator is not asking for any documentation or monitoring the uptake, and there is no whistleblowing procedure, it’s not clear how this will be policed, or what repercussions there will be for trustees that choose to ignore it.”

Bell continued: “For schemes that already have good governance in place, the new code will help them tighten up their risk management processes further, and those who are keen to improve will likely find the updated code a useful tool. 

“However, introducing and demonstrating the Effective System of Governance (“ESOG”) required by the new code will add a further layer of administration to trustees’ workloads, and without improved software systems to support them they could become overwhelmed by additional administration that takes their focus away from strategy, and adds extra costs and complexity.” 

A welcome milestone

Tiffany Tsang, head of defined benefit (DB), local government pension scheme (LGPS) and investment at the Pensions and Lifetime Savings Association, said the new code is a ‘welcome milestone’ for pension schemes. 

She said: “Good governance is paramount for successful scheme operations. TPR's fresh approach aims to enhance user-friendliness which will ensure better interaction with the codes. It will also promote greater consistency in language and timely updates, benefiting schemes in their compliance efforts. 

“We are pleased as well that the specificities of the important LGPS differences in language over governing bodies have been acknowledged and addressed."

Consultancy Barnett Waddingham also applauded the 71-page document for giving clarity on a variety of topics including diversity, scheme continuity and cyber controls.

Christine Kerr, principal at Barnett Waddingham, said: “Although somewhat later than expected, the industry is now able to digest the definitive General Code, which cements the move to make governance centre stage. We are delighted that some of the problems we highlighted with the first draft have been addressed.

“Points particularly worthy of note include the following:

“Those schemes with 100 or more scheme members are required to carry out and document an own risk assessment as part of the scheme’s ESOG. It had been speculated that the ORA requirements would be watered down from the original draft code in that the focus was to be the ESOG. The final code effectively links the two concepts. 

“The focus is now on the ESOG and ORA outputs working interactively; if significant changes or risks are identified then these need to be captured and recorded in both documents. It is clear that the Effective System of Governance is the area on which TPR wishes trustees to focus.

“Clarification has been provided in relation to remuneration policies: these should only cover costs for which the governing body is responsible. The requirement to make them available to members has also been removed.”

This was echoed by David Brooks, head of policy at Broadstone, who said: “The general code is essentially the Trustee Handbook for running a pension scheme well. It will be used by TPR as the benchmark for trustees to assess if they’re doing the right things for their members and so it is an important document for driving up governance standards.” 

Cyber

The general code emphasises the importance of managing cyber risk. Michael Do, associate director at independent trustee firm IGG, said: “TPR updated its cyber guidance at the end of last year and has now finalised its regulatory expectations for how trustees should be managing cyber risk.

“In short, simply having cyber on your risk register is not enough. IGG has a developed Cyber Resiliency Framework, which covers key activities set out in the guidance and the General Code, to aid schemes not only to meet, but exceed, these requirements.

“We strongly believe that going above and beyond minimum standards is the only way to help deliver the security and certainty that 21^st century pension schemes need.” 

Triennial ORAs

Commenting on the code’s stance to Own Risk Assessment, Michelle Burgess, associate partner at Aon, said: “The change in the requirement for trustee boards to produce an Own Risk Assessment (ORA) to a triennial requirement, rather than annually as indicated in the consultation, is good news.  We expect that trustee boards are more likely to carry out a meaningful ORA on a less frequent basis. 

 “This is a key part of the Code and trustee boards will need to have a robust audit trail of their risk management activity to produce their ORA efficiently. In response to the consultation, trustee boards have already been reviewing their risk management framework to ensure that they have good visibility of the activity to manage risk on an ongoing basis.

“This section of the Code has been taxing trustee boards who recognise the importance of enhancing their risk management practice and improving the reporting in order to be able to manage the ORA requirement. It is helpful that the risk management requirements have prominence within the Code, given their importance.

“As expected, schemes with less than 100 members are exempt from the ORA requirement, leaving them to focus on their Effective System of Governance.”

Burgess also commented on the code’s remuneration policy. She added: “The requirement for trustee boards to have a remuneration policy is an important step towards full transparency of costs for pension schemes and builds on the good work already completed in the investment space. It will also encourage trustee boards to have greater focus on their financial management.

“For many schemes, this will be the first time they prepare such a policy. However, as there is no actual guidance provided by TPR on what to include in such a policy, we would expect there to be varying degrees of detail covered in policies across different pension schemes. This will no doubt be a developing area.”