The Pensions Regulator (TPR) has published its long-awaited general code of practice.
The code, laid in parliament today (10 January), aims to improve pension scheme governance - consolidating ten of the regulator's existing codes and updating them in the process, but also introducing some new requirements.
The new obligations include a requirement to establish an effective system of governance (ESOG) and, for those schemes with 100 or more members, to undertake an own risk assessment (ORA), an examination of how well the ESOG is working and how any potential risks are being mitigated.
TPR interim director of regulatory policy, analysis and advice, Louise Davey said: "Our new general code is an opportunity for governing bodies to make sure their schemes meet the standards of governance we expect, and savers deserve. It means there is no excuse for failing to know what TPR expects of them.
"Some governing bodies have already grasped this opportunity and carried out analysis to ensure there are no gaps in their governance. However, we believe there are many who have not done so and risk falling short of our expectations.
"Those that do not meet the code's expectations should take action to improve their scheme's governance.
"Trustees of schemes unable to meet our expectations should consider whether defined contribution (DC) savers would be better off in a larger, better-run scheme, and whether defined benefit (DB) savers would see higher standards of governance in a consolidation arrangement.
"At the very least governing bodies should be aware of where they fall short of our expectations and have clear and realistic plans in place to address those shortcomings."
TPR noted the results from its annual survey of trustees of DC trust-based pension schemes, published in July 2023, showed trustees of four in 10 (40%) micro and small schemes were either unaware of TPR's codes of practice or had never used them.
And, it said that, despite extensive industry engagement during the consultation on the new code, less than one quarter (23%) of the trustees of these schemes were aware the new code was set to be introduced - with trustees of small and micro schemes the least likely to report being aware, just one-fifth (19%) and almost one-tenth (9%) respectively.
Clock now ticking
Consultants say that, while the code hasn't changed much in substance from the March 2021 consultation draft, its publication means "the clock is ticking" for trustees to take action on some of their governance obligations.
Lane Clark & Peacock (LCP) partner and head of governance Rachika Cooray 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 added there were, however, some welcome changes in the final published version of the code.
She explained: "One welcome change from our perspective is the softening of the ORA requirement, which is now triennial rather than annual. Trustees and sponsors may also be pleased to hear that there is no longer a requirement for the remuneration policy to be published online."
LCP said it expected most well governed schemes to fare well against the code - but noted there will be areas that need further work and documentation, for example climate change and cyber risk.
Cooray added: "The biggest challenge for schemes will be how to address the code's new requirements proportionately, within the available time and budgets. Nevertheless, giving time and attention now to how trustees operate can only lead to improvements in how boards make decisions, get better accountability and ultimately deliver better outcomes for members."
Ramping up scheme governance
Hymans Robertson head of governance consulting Laura Andrikopoulos said that, after a lengthy delay, "during which 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 said: "Delayed effectiveness and governance reviews can 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 DB schemes, which have not been subject to the same regulatory requirements as DC schemes have seen in recent years, such as the chair's statement."
Andrikopoulos added: "The biggest change for schemes will be the ORA requirement, and we are pleased that this final version of the code recognises, in line with the underlying legislation, that a report once every three years is sufficient. This is in line with other major requirements such as the triennial actuarial valuation, and will save schemes from what could have been a substantial annual process. The clarifications in the final version of the code are also helpful - for example, that the ORA can be a collation of other relevant documents. Trustees may also be relieved to see the enhanced emphasis on proportionality in relation to the risk management function and the assurance requirements.
"Before the code comes into force in the spring, schemes should now dust off their gap analyses and proceed with identified policy gaps, a review of their risk management and preparation for their first ORA."
Aon associate partner Michelle Burgess agreed the code was largely as anticipated following the consultation in 2021 - noting most well-run schemes were are already largely complying with the requirements.
She said, however, she had concerns about the increased governance burden for smaller schemes.
Burgess said: "Our main concern is the increased governance burden and associated costs this will bring for the smallest schemes, many of which will have adopted a proportionate approach to governance and are now likely facing the largest hurdles."