TPR to amend single code as industry slates new requirements

The new code is intended to combine 10 of the 15 existing codes of practice into one modular document, aiming to make it easier for governing bodies in the pensions industry, along with professional services providers, to identify their legal duties, as well as TPR’s advice on how to meet them.

The consultation was controversial from the start, not least because the proposed single code went much further than merely combining existing documents. 

LCP warned as far back as March this year that the proposed code introduced a raft of new duties and requirements around climate change, cyber security, investment, administration and remuneration policies.

We consider that this will be the single biggest work-stream for pension schemes in 2022, even surpassing GMP equalisation

Kate Bailey, Squire Patton Boggs

It was also intended to incorporate new “effective systems of governance” requirements mandated by the EU’s Institutions for Occupational Retirement Provision II directive, the most onerous of which being the need for pension schemes with more than 100 members to carry out an “own risk assessment” each year.

TPR’s demand that the assessment be carried out annually went over and above the triennial regulatory requirement, prompting LCP senior consultant Tony Bacon to warn that the new code represented “another substantial item on already crowded trustee agendas”.

The consultation into the code met with criticism in May by a range of industry bodies including the Society of Pensions Professionals and the Pensions Management Institute, warning that the industry had been given too little time to properly consider the matter, with SPP legislation committee chair Mark Bondi warning, presciently, that the code could end up being “flawed and costly to implement”.

That same month, a Barnett Waddingham webinar found that many trustees were not aware of the implications of the new code, prompting questions about the effectiveness of TPR’s guidance.

Unregulated investments rules scrapped

In a sign that all was not well with the new code, TPR told the Financial Times earlier this month that it would drop the limit on “unregulated investments” from the new code, which many industry commentators said would limit schemes’ investments in infrastructure and private equity, as well as start-up businesses, all of which the government is keen to see increase.

In its interim response to the code of practice consultation, published on Tuesday, TPR said it had received "strongly argued comments concerning a limit on unregulated investments”, often referred to as the 80 per cent or 20 per cent rule because it would prohibit schemes from holding more than 20 per cent of their assets in unregulated markets.

Tim Middleton, director of policy and external affairs at the PMI, told Pensions Expert in May that “new guidance such as this warrants its own consultation rather than be buried in the consolidated code”.

“Some respondents had interpreted this proposal as a restriction on illiquid investments,” TPR’s interim response said.

“Our intention had been, and remains, to protect members of poorly run, and typically small, schemes from investments in poor quality or inappropriate assets. In setting out that expectation we inadvertently created a position that would affect well governed, typically larger, schemes that hold unregulated assets as part of a well-managed investment strategy.” 

"We will not be proceeding with this expectation in the way it is drafted,” it continued, adding that TPR “will explore options for achieving our original policy objective whilst allowing schemes with liquidity risk management plans and prudent investment strategies to maintain exposures to unregulated assets”.

'Own risk assessment' at risk

Industry criticism was not restricted to the rules around unregulated investments, however.

While the code aimed to incorporate the EU’s IORP II “effective systems of governance requirements”, its demand that schemes with under 100 members carry out an “own risk assessment” annually went further than the IORP II minimum requirements.

In its interim response, TPR said that these new governance requirements had attracted “the greatest attention” from respondents to the consultation, and signalled that it may look to relax the measure.

“Most respondents appear to have correctly understood the purpose of the ORA as a review of a scheme’s existing risk controls. Few, if any, respondents objected to the principle of this new process,” it said. 

“However, some did raise concerns about the amount of work it would entail, the timeframe, what the finished product would look like and the burden it would place on smaller schemes.” 

“Following feedback, we remain of the view that trustees should prepare their first ORA in a timely fashion, ie. taking the legislative timescales as a maximum but preparing the document in a shorter timescale as a matter of best practice,” it continued.  

“We will also consider how often governing bodies should review the ORA,” it stated, and “we continue to work through the responses in this area to identify other possible changes or guidance requirements, particularly for smaller schemes”.

David Fairs, TPR’s executive director of regulatory policy, analysis and advice, said: “I’m confident the feedback received during our new code consultation will help ensure the final version provides a clear, up-to-date and consistent source of information on scheme governance.

“I want to thank governing bodies and industry stakeholders for taking the time to be a part of our consultation process and reassure them that we have listened to concerns over limits on unregulated investments and the timeframe for the new own-risk assessment.”

A bigger workload than GMP equalisation

The interim response made no mention of what would constitute “proportionality” in the way in which the new code would apply to smaller schemes in particular.

Squire Patton Boggs director Kate Bailey told Pensions Expert: “The draft single code of practice sets out significant governance requirements for pension schemes. TPR makes it clear that 'governing bodies need to use their judgement as to what is a reasonable and proportionate method of ensuring compliance with the Code.”

“Proportionality will be crucial to shaping how trustees approach compliance for their schemes, but it is not clear what TPR expects proportionality to look like,” she said.

“For example, do smaller schemes merit a lighter touch to compliance? Are greater levels of governance needed for schemes with more complex benefit structures? What about schemes nearing their endgame?

“We hoped to hear more about this crucial issue of proportionality in TPR’s interim response, which would have helped trustees with their compliance preparations. We recommend that trustees take legal advice on their approach to the code.”

Trustees should waste no time in beginning preparatory work in advance of the code’s introduction, she noted, adding that “the sheer volume of activity required necessitates giving this early attention”.

“We consider that this will be the single biggest work-stream for pension schemes in 2022, even surpassing GMP equalisation.”

She continued: “A systematic approach will be required in order to run a compliance project in parallel with all other activity keeping pension trustees very busy at present,” and added that compliance with the code will require “a co-ordinated effort by the trustees, their advisers and any in-house support within the scheme sponsor”.

“The approach to be taken will need to be tailored to individual scheme circumstances, meaning that 'off-the-shelf' compliance products will not assist,” she said.