Pension Pillar

NEW CODE OF PRACTICE

by Dale Critchley Policy Manager Aviva

The Pensions Regulator’s (TPR) new code of practice was published last month and while many of the 149 pages are a clearer communication of existing expectations, there are some requirements which are new.

One of the new requirements is that trustees have an effective system of governance (ESOG), and that they carry out an annual own risk assessment (ORA) on how effective that system is. While the emergence of more acronyms into an industry already overflowing with them isn’t something I would usually welcome, I think these new requirements are important in helping to raise the bar on scheme governance.

The requirements apply to all areas of governance required to ensure the smooth operation of the pension scheme, and the safety and security of member assets. TPR expects that trustees will have processes and procedures in place to cover 17 of the 51 modules included within the new single code of practice.

Trustees need to have processes in place around governing the scheme, for example - meetings, the decision-making process, trustee remuneration, knowledge and understanding, dispute resolution and continuity planning. The processes which relate to the Chair’s role, conflicts of interest and management of advisers and service providers also need to be covered. Investment governance requires a raft of controls including decision making, monitoring, stewardship, and climate policy. The final area that needs to be covered is around the principles to monitor member communications.

Many trustee boards will cover these aspects but may not have their policies and processes documented and agreed. Processes may have evolved over time, rather than been specifically designed to deliver the best member outcome in a way that maximises trustee efficiency. The requirements are very similar to those that already apply to master trusts, which are required to demonstrate this level of control as part of the authorisation process, and will be a significant undertaking for some trustee boards.

Schemes with more than 100 members are required to have a risk management function in place. This should be proportionate to the scheme’s size and complexity and its responsibility is to identify and evaluate risks and internal controls.

In addition, schemes with over 100 members are required to carry out an annual ORA on their governance processes. It also requires schemes to establish and maintain policies for the review of each element of the ESOG and to review those polices at least every three years to make sure they remain relevant.

TPR warn that “the ORA is a substantial process, and the governing body may need to expand its risk assessments to fulfil our expectations”. Those expectations are laidout over three pages within the new code of practice.

Once again, master trusts will be largely meeting the ORA requirements, as the ongoing supervision of master trusts already requires an annual audit of the effectiveness of trustee processes.

For smaller schemes, it’s clear that the workload of trustees is set to increase. While the code requires the response of trustees to be proportionate to their scheme, the scope of the controls to be put in place, and tested, is very much prescribed.

When tPR looked at options to raise governance standards, it stopped short of requiring professional trustees to be appointed. What the new code requires is greater professionalism from all trustees. Inevitably, this will come at greater cost to employers.