The long awaited UK’s General Code is expected to improve governance standards, but consultants express concerns over potential financial strains for smaller schemes.
After a lengthy delay, The Pension Regulator (TPR) has today published its General Code of Practice which is expected to come into effect at the end of March.
David Brooks, head of policy at Broadstone, compared the General Code to a handbook for trustees.
He said: “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.”
However, he highlighted that the last draft the industry saw was released in August 2021 as part of an interim update and the publication of the latest Code has been “long promised, eagerly awaited but much delayed”.
The Code was consulted on from 17 March 2021 to 26 May 2021 and was expected to come into effect in autumn of 2022, however it was delayed due to political upheaval and the COVID-19 pandemic.
“It is great that the General Code has finally been laid before parliament as it will provide trustees with clarity on their roles and responsibilities, especially given the growing scrutiny over the role of trustees,” Brooks noted.
Laura Andrikopoulos, head of governance consulting at Hymans Robertson, said that during the delays trustees may have put ‘pens down’ on their projects to ramp up scheme governance. The laying of the General Code means these important projects can now be resurrected, she noted.
She added that delayed effectiveness and governance reviews can also now be performed with greater confidence on the actual requirements.
“The laying of the Code heralds an important step-up in the governance of occupational pension schemes, particularly defined benefit (DB) schemes, which have not been subject to the same regulatory requirements as defined contribution (DC) schemes have seen in recent years, such as the Chair Statement,” Andrikopoulos said.
Michelle Burgess, associate partner at Aon, said although the Code was largely anticipated following the consultation in 2021, enhanced standards of governance were welcome.
“My experience is that most DC schemes and well-run DB schemes are already largely complying with the requirement to have an effective system of governance so the Code will result in current practice being documented more formally than in the past,” she said.
However, Burgess is concerned tehre will be an increased governance burden and the associated costs for the smallest schemes, “many of which will have adopted a proportionate approach to governance and are now likely facing the largest hurdles”.
Mary Lambe, head of public sector governance at Aon, said the move from one dedicated Code to a General Code for all schemes will require “fresh thinking” into how to interpret and how best to assess and demonstrate compliance with the new Code.
She said that while well-run schemes are expected to be giving real consideration to all relevant areas of the new Code, this will require resources.
“Even schemes which fared well against the requirements of the previous Code will need to set aside time and resources to manage the requirements of this new general Code,” she explained.
Lambe added that this work, alongside more governance requirements expected in 2024 for Local Government Pension Scheme (LGPS) funds through expected consultations and regulations on the back of the Scheme Advisory Board’s Good Governance project means governance needs adequate, dedicated, ongoing resources.
ORA
Rachika Cooray, partner and head of governance at LCP, said the Code hasn’t changed much in substance from the March 2021 consultation draft, but its publication now means that the clock is ticking for trustees to take action on some of their governance obligations.
She said that the most significant of the new obligations in the Code is to establish an effective system of governance (ESOG), and for schemes with 100 or more members, to undertake own risk assessment (ORA), which is an examination of how well the ESOG is working and how any potential risks are being mitigated.
She said: “Regardless of where you are on your General Code journey, it’s time to start planning for your first ORA and the steps that need to be completed beforehand.”
“If trustees haven’t already, they should compare their scheme’s existing governance frameworks against the ESOG requirements and identify any gaps to be addressed.
“This will enable trustees to address the changes and help them to prioritise the areas which will add the most value to how they operate,“ Cooray stated.
Andrikopoulos said that TPR’s recognition that ORA reporting once every three years is sufficient is in line with other major requirements such as the triennial actuarial valuation, and it will save schemes from what could have been a substantial annual process.
The clarifications in the final version of the Code that the ORA can be a collation of other relevant documents is also helpful according to Andrikopoulos.
Burgess agreed that the change in the requirement for trustee boards to produce an ORA to a triennial requirement is “good news”.
She said: “We expect that trustee boards are more likely to carry out a meaningful ORA on a less frequent basis.”
Burgess said that 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.
Burgess said that 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.
She added: “This section of the Code has been taxing trustee boards who recognise the importance of enhancing their risk management practice and improving the reporting to be able to manage the ORA requirement.
“It is helpful that the risk management requirements have prominence within the Code, given their importance.”
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