TPR’s new code of practice has ‘major implications’

The new code’s ostensible purpose is to combine 10 of the 15 existing codes of practice into one web-based document. 

David Fairs, TPR’s executive director for regulatory policy, analysis and advice, said: “The new code of practice represents TPR’s ambition to create a single point of consistent and up-to-date information for all pension scheme governing bodies.

Some schemes may think they have enough on their plate, but the issues that these risk assessments address are ones that can have a big effect on member outcomes. Getting governance right is the foundation for getting everything else right

Jenny Gibbons, Willis Towers Watson

“It will determine how governing bodies should approach governance and administration and provide consistent expectations across different types of scheme, set at a level we consider appropriate for any well-run scheme.”

The “user-friendly” code “should make it easier for governing bodies, and those providing them with professional services, to distinguish between legal duties they must meet and what we expect should be done to comply with those duties”, he added.

However, as noted by LCP, the new guide goes far beyond a simple “cut-and-paste” job, introducing a raft of new duties and requirements around climate change, cyber security, investment, administration and remuneration policies.

Another ‘substantial item’ on trustee agendas

Part of the reason behind the inclusion of these new duties is the need to incorporate “effective system 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 goes over and above the triennial regulatory requirement.

The “own risk assessment [..] is an assessment of how well governance systems are working, and the way potential risks are managed”, the consultancy noted.

The regulator said it “expects governing bodies to use this to assess how well their policies and procedures address various risks, financial and operational, that their scheme faces”.

Tony Bacon, senior consultant at LCP, said: “As well as setting out new duties in areas not previously covered, such as cyber security and climate change, it brings in additional duties on schemes.  

“A key new duty will be for schemes to annually evaluate how well they are governed and this could be a further driver for the pension scheme consolidation, which government and regulators want to see.”  

Bacon added: “Our main concern is that this new document seems to bring a range of prescriptive governance requirements, which will be another substantial item on already crowded trustee agendas.”

However, Hymans Robertson’s Laura Andrikopoulos welcomed the incorporation of IORP II requirements, in particular. 

“The enhanced focus on the quality of risk management, a consequence of the transposition of the IORP II regulations into UK practice, is particularly welcome. The own risk assessment annual process will bring a much-needed focus on current risk management practices, which have been under scrutiny in the past year due to the materialisation of a major risk to business continuity,” she said.

Other parts of the code are ‘completely new’

The incorporation of the IORP II requirements is not all about the part of the code that is “completely new”, said Mike Smedley, partner at Isio.

“For example, the regulator expects schemes to publish on a website the remuneration policy for trustees and supporting staff,” he said.

“I wouldn’t recommend it as bedtime reading, the long lists of things that trustees should be doing might give them nightmares.

“We need to read and digest the detail, but a scheme that complies with every expectation in full will surely need thousands of pages of documentation.”

Sara Cook, principal at Barnett Waddingham, highlighted the inclusion of new details around risk assessments, stewardship and climate change as giving trustees “their first glimpse of the governance wake-up call that is coming their way”.

“Is this the biggest change to pension scheme governance in the past 15 years? We’ll have to wait and see; the new code of practice does make it clear that trustees may need to expand their risk assessments to meet the regulator’s expectations,” she said.

“With new sections on stewardship and climate change, we can see an increased focus on trustees’ effective investment governance as the UK economy transitions to net-zero by 2050.

“Better informed trustees can better manage their scheme’s exposure to climate change risks, and be in a better position to take advantage of investment opportunities that emerge during the transition to a low-carbon economy.”

Jenny Gibbons, head of pensions governance at Willis Towers Watson, cautioned that these new requirements “will typically be greater for smaller schemes”.

“The regulator acknowledges approaches here should and will differ based on scheme size and circumstances, but there will inevitably be some fixed costs and the work needed in relation to some threats such as cyber risk cannot always be scaled down,” she said.

“Some schemes may think they have enough on their plates, but the issues that these risk assessments address are ones that can have a big effect on member outcomes. Getting governance right is the foundation for getting everything else right.”