Much delayed code may be ready for April 2024
The code needs to be laid before parliament for 40 days on a negative affirmation basis. If no MPs object, it will become effective after that period. With parliament due back from September 4th, this means late Autumn at the earliest, although some say it could be as late as April 2024.
David Brooks, head of policy at Broadstone, comments: “The general code is the long-awaited trustee handbook of ‘how to run a pension scheme’. The last draft the industry saw was released in August 2021 as part of an interim update and has been well thumbed by pensions professionals ever since. The reason for the delay is unclear… It has been a very long wait and it would be helpful to have a publication date agreed.”
Janice Turner, co-chair of the AMNT adds: “The AMNT looks forward to seeing the long-awaited general code from the Regulator. The code is a sensible development in bringing together 10 previous different codes into one. Its anticipated requirements of trustees and governance underline the need for the trustee support that we proposed in ourrecent proposals on the future of trusteeship.”
For some boards, the delays are causing headaches. Roseanne Corbett, client director at Muse Advisory and outsourced pension manager says: “Most schemes are working on the basis that it is coming, but they're not entirely sure when and what work they should be doing now versus waiting until it's out. That will always be a challenge for those that are constrained by resources of people, time and money.”
Minimal changes ahead
The code applies to governing bodies of occupational, personal and public service pension schemes.
However, not all legal obligations apply to all bodies and TPR says that trustees must “use their judgement as to what is a reasonable and proportionate method of ensuring compliance for their scheme”.
TPR has indicated that the final version will be very similar to thedraft code. However, there are some minor amendments expected.
Paul Tinslay is a professional trustee for DB and DC pension schemes at Dalriada, including chair for sole trustee positions. He explains: “TPR’s comments at the PLSA seminar and webinar earlier in the summer suggested that the final version is mostly unchanged from the draft, with the majority of the changes limited to just three areas:
● the remuneration agreement, although no further comments were made on the changes;
● the risk management function, again with no further comments on the changes; and
● the own risk assessment (ORA), with comments that the timing would be more aligned to that stated in SI 2018/1103 and that it would be slimmed down. “
Brooks agrees, adding: “The new sections have been in regulations since January 2019 and so we are not expecting any major changes beyond perhaps some polishing of the text for greater clarity.”
Why schemes must prepare now
Despite the delays, many of the actions are already required by law. For instance, since January 2019 the law has required trustees of occupational pension schemes to operate an Effective System of Governance (ESoG), including internal controls.
Tinslay says: “There is no justifiable reason for any trustee to delay implementation. To do so would continue to ignore the legal requirement.”
Indeed, many schemes say they’ve been prepared for some time. A spokesperson for Railpen adds: “we are waiting in anticipation of TPR’s new code and are prepared and ready for when it’s published.”
A spokesperson for The Pensions Regulator told Pensions Expert: “We would urge governing bodies that have not already done so to carry out analysis to identify possible gaps in their governance before the code comes into force.”
“We are keen for the regulated community to see the finished code and are now waiting for a gap in the parliamentary timetable to enable it to be laid.”
What can schemes do now?
Tinslay says that the general plan for implementing the evidence around the ESoG is as follows:
● Establish a risk management team as a sub-committee (RMSC) with a written terms of reference.
● Clearly understand the journey plan for the scheme. This helps identify the activities to which proportionality is applied.
● For schemes with 100 members or more, the RMSC should draft the trustees’ policies for the three key functions and outsourcing policy – these need prior approval from the trustees.
● The RMSC then drafts a scheme specific governance framework, including an effective internal control system, to evidence the ESoG and simplify the production of the ORA.
● The framework must include an adequate and transparent organisational structure with a clear allocation and appropriate segregation of responsibilities, to evidence sound and prudent management, together with a system for ensuring transmission of information, to ensure it is effective.
● Within the framework, the RMSC must also record the application of proportionality against each aspect of the scheme’s governance, together with the rationale.
● The RMSC then completes a scheme specific review of the governance documents, policies, procedures, processes, logs, statements, registers, lists etc (the gap analysis), incorporating the applied proportionality.
● Next, the RMSC drafts an order of priority for risks and required improvements identified in the gap analysis.
● The trustees then incorporate this into the scheme’s business plan, to integrate the governance improvements into ongoing management and decision-making processes.
● The RMSC then identifies appropriate stress testing, to evidence the effectiveness of the system of governance and drafts each element of the stress test plan, e.g. a simulated cyber security breach.
● The framework should incorporate a review timetable for each element of the ESoG and stress tests, together with a process that ensures that any necessary changes are made and review policies at least every three years.
● The RMSC then presents all of this to the trustee board, makes any agreed adjustments and records the approval.
Corbett says that much of what is involved in both the ESoG and the ORA is good governance practice for schemes, and should therefore be a priority, even while we wait for the official code.
She adds: “Use this as an opportunity to get your risks identified and documented, do a bit of best practice, start a risk register and then think about how to put a better process in place to keep on top of that going forward.”
For schemes that are struggling with implementation, she recommends looking to other countries, such as Ireland, where the code of practice is already in effect. These schemes have risk management function holders and internal audit functions, and are doing their own risk assessments ahead of their April 2024 deadline.
Challenges ahead
While most agree that the new code is a force for good, there are concerns about the burden it may place on trustee boards, who already face huge amounts of compliance and reporting.
Steve Delo, chairman of PAN Trustees says: “It…should at least pull together TPR thinking and the more lax trustee boards will have to up their game. The compliance costs will probably look hefty for smaller schemes. Trustees already have to produce a lot of detailed documentation, often read by next to nobody, raising questions about whether the drain on trustee bandwidth is worth it.
“Given trustees are already very busy with heavy annual compliance and disclosure requirements, there is danger of trustees being dragged into a compliance/disclosure/document checking merry go round at the expense of quality training, brainstorming and decision-making time.”
Turner warns that employers will need to make allowances for lay trustees if the code is to be a success. She says: "It’s obvious that the best trustee boards are the ones with the best knowledge and understanding and sufficient time to fulfil their duties to the best of their abilities, and indeed the draft of the general code also made this clear.
“We trust that TPR's expectations of boards will be accompanied by expectations on scheme sponsors to ensure that trustees are allowed sufficient time away from their day jobs to fulfil these extremely important responsibilities on which people’s pensions depend. It is essential that member nominated trustees continue to play their role in pension schemes as they, more than anyone, understand the scheme from the point of view of the scheme beneficiaries".
Brooks points to two gaps in the draft code, which are causing problems for small schemes in particular.
He says: “Many boards will have taken some time to assess their compliance... The law is the law so any legal requirements will be met already, and the new requirements could be planned for.
“What isn’t clear and makes any further action difficult is two-fold:
● the level of proportionality that will exist, especially for well-run small schemes. Boards do not want to rack up fees undertaking work that may prove unnecessary.
● the level of work required to prepare an own risk assessment which is ill-defined and poorly understood… This should also be prepared within 12 months of the code coming into force. This could be a major undertaking for many boards.”
Trustees should note that proportionality is applied to the activities of the scheme, rather than its size. Dalriada anticipates that small scheme consolidation is a likely outcome of the ESoG requirements. Small schemes should also look out for single person risk, where one person has a key role with no documented contingency plan.
Slow and steady wins the race
Given the challenges, it is critical that pension funds take a considered approach, where work needed is slotted in around existing responsibilities.
Wai Wong works in the sole trustee team at Capital Cranfield and has experience of smaller and bigger schemes. He says boards should be planning how reviewing and drafting new policies will fit in with business-as-usual demands, resources and budgets, as well as ongoing and planned project work.
Wong adds: “Ideally we’d adopt a joined-up approach to ensure implementation is coordinated and integrated with planned work programmes and flows, otherwise it can become piecemeal, out of cycle and risks being turned into a box ticking exercise.”
To achieve this, he says that schemes should “plan ahead as you would with any good housekeeping project”. This includes considering what a proportional approach might look like.
In her role as a scheme manager, Corbett is already grappling with many of these challenges. She agrees that a pragmatic and staged approach is key.
She says: “We're doing it in a very iterative way, which means we can fit it in to our busy agenda of work and prioritise things that are helpful… For instance, we've reviewed our risks because we’re thinking about our long-term funding objective, and it made sense to do it at the same time.
“You can tackle it in bite sized chunks… and if schemes can use the risk assessment as a forward-looking tool, it will help set them up for success… Yes, it will be hard the first time they do it. But if they get it right, it can be something that's embedded into their ways of working and becomes a meaningful tool.”
Getting the right advice
Lay trustees may need help implementing both ESoG and ORAs. Advisers are useful, but cannot help with adviser appointment, assessment and removal policies and procedures.
Professional trustees may be able to provide support, and there is evidence that they are being appointed to chair RMSCs, even where they are not appointed to the trustee board. They can also provide a contingency plan for single person risks.
Wong concludes: “Consider who’s going to do the heavy lifting, what help you’ll need, where you’re going to get it from, at what cost, and decide what the trustees can delegate, for example to the Scheme Secretary (if there is one).
“Note that advisers are offering different levels of support and there isn’t a one-size fits all approach. Tailoring the approach to your scheme’s individual circumstances will help deliver proportionality – but remember to document discussions and decisions.
“Finally, don’t forget to communicate with the employer: GCP is about governance and scheme management; it comes at a cost but done well it can be value adding.”
