The Pensions Regulator (TPR) has finally issued its new General Code of Practice (the Code). It has been laid before Parliament and is expected to come into force on 27 March. The General Code consists of 51 shorter modules and consolidates and replaces 10 of TPR's existing codes of practice (COPs) on the governance and administration of pension schemes (although it is intended by TPR that others will be subsumed into the Code in due course, e.g. the COP on Notifiable Events). Please see our recent blog here (The Pensions Regulator's General Code published, Susannah Young (burges-salmon.com)) for a general overview of what the Code does and what has changed from the consultation back in 2021 on the first draft of the Code.
The pensions industry and a scheme’s “governing body” (a new term introduced by the updated Code to more accurately capture all parties that run pension schemes) must now familiarise themselves with the revised Code ahead of its implementation date and will need to quickly understand what key actions will be required and by when. It is worth noting that all of the required actions will be for the governing body as the entity ultimately responsible for compliance with the obligations set out in the Code, irrespective of who performs the particular tasks on the ground (e.g. the scheme administrator, investment manager etc). For example, the Code makes it clear that it is the governing body that has the obligation to carry out the Own Risk Assessment (ORA) albeit it acknowledges that in practice the governing body may delegate the carrying out of the ORA.
This update will assist a pension scheme’s governing body to assess the key obligations and actions as set out in the Code and by when they should be implemented. Your usual Burges Salmon pensions contact is of course always on hand to delve deeper with you into particular obligations or actions on a scheme specific basis (for example if climate change requirements are of particular concern – the Code now specifically incorporates the legislative climate-related governance and disclosures requirements).
What has changed from the draft Code?
As has been widely reported, there has been a slight change in position by TPR in relation to certain aspects of the Code and there are also a significant number of changes that have been made from the draft Code consulted on in 2021. Some proposed new requirements have been removed (e.g. the requirement for professional trustees to hold professional indemnity insurance), some modules have also been added, combined, strengthened or removed altogether and some deadlines have been pushed out (e.g. reporting employers for not making contributions – now a 28-day period for reporting rather than 14 days). But most importantly in relation to one of the key requirements under the Code, the ORA, there is now recognition by TPR that the majority of what will be required for that should already be in place and so TPR is not expecting schemes to duplicate work where existing risk assessments already fulfil ORA expectations.
Burges Salmon has prepared a checklist in relation to the modules and obligations set out in the first draft Code. That checklist (and our standalone checklist relating to ESG/climate change specific aspects of the Code) is in the process of being updated and will be provided to you by your usual Burges Salmon contact as soon as it is available.
TPR’s expectations regarding the Code
Before considering the main actions for the governing body and any applicable deadlines for completing them, it may be reassuring for governing bodies to note that TPR has stated that “in many instances, the code is not prescriptive about methods that governing bodies should use to meet our expectations, in recognition that different approaches may be appropriate for different schemes”.
So it is clearly envisaged by TPR that flexibility will be permitted in terms of how it is demonstrated by a scheme that the various obligations have been met, i.e. no “one size fits all” approach is required. It is also envisaged by TPR that the governing body will be meeting most of the requirements in the Code already – indeed TPR notes that ”expectations set out in the new code already exist in our COPs. Unless an expectation is new, such as the ORA, schemes should already be meeting the provisions set out in the new code”.
Key actions and timescales
The table below sets out the key actions for the scheme’s governing body, and by when. To note, these are the main high-level actions – clearly each of these key actions will in turn require various subsets of actions to be taken in order to comply with the over-arching main obligation (e.g. the ESOG). Again your usual Burges Salmon contact can assist you to work through each action and all of the underlying actions that may be required – as noted above there will be no one approach that suits all – every scheme will be different in terms of what stage it is at with its ESOG and what it now needs to do to comply with the Code.
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Action
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Timescale
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Recurring frequency
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BS Comment
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Other points to note
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Establish an Effective System of Governance (ESOG)
To briefly recap, an ESOG includes a scheme’s internal controls. It is basically the scheme’s processes, procedures and policies it has in place in order to ensure the scheme is run in an effective and efficient manner. An ESOG framework will include processes and procedures across all of the modules in the Code relating to management and running of governing body activities, funding and investment, administration, communications and disclosure and reporting.
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The legislative requirement for an ESOG has been around since January 2019 so it is expected that most schemes will have one in place already but the governing body should be regularly assessing whether there are any gaps in their ESOG, where further action is required and update the ESOG as appropriate.
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Should be maintained on an ongoing basis and updated/strengthened as and when gaps are identified.
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This is still viewed by TPR as the most important action – TPR has noted that whilst the ORA is important, it believes that the focus of governance activities should be on maintaining an effective system of governance.
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TPR does note that the system of governance “must be proportionate to the size, nature, scale and complexity of the activities of the scheme”.
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Preparing the Own Risk Assessment (ORA)
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The first ORA is now to be completed on own timescale. But the first ORA must be published in accordance with statutory requirements, i.e. within 12 months beginning with the last day of the first scheme year that begins after the Code comes into force on 27 March 2024.
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The Code notes that the ORA should be carried out in its entirety at least every three years.
However, TPR have indicated that in any event the ORA should be reviewed by the governing body on an ongoing basis as best practice and as part of the scheme’s regular governance oversight.
TPR also expects that new assessments should be carried out where elements of the ESOG or risk management processes are new or updated and whenever there is a material change in the ESOG or the risks facing the scheme.
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TPR have confirmed that the ORA can reuse material that examines the same areas covered by the schemes existing risk assessment processes.
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Clearly the first step before an ORA can take place is to ensure there is an ESOG in place.
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Preparing new scheme policies required in order to comply with new aspects of the Code
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As soon as possible.
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Good practice to review regularly and update as appropriate.
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There are a number of new policies that will be required to be adopted in order to comply with the Code. These include policies on ORA and remuneration.
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There are also policies which, whilst not essential to be documented, may nevertheless be good practice to have in place, e.g. succession planning.
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Other specific points to note that may be of interest
There are a few other standalone points to note that we expect might be of interest and/or relevance depending on your scheme’s circumstances.
Professional trustees
TPR has strengthened the requirements in terms of professional trustees. It now states that professional trustees should be complying with TPR’s professional trustee standards and guidance and professional codes of conduct and trustee accreditation such as those published by APPT and PMI.
How will the Code apply to schemes such as Small Self-Administered Schemes
The Code applies to governing bodies of occupational, personal and public service pension schemes. So would include in its application Small Self-Administered Schemes. As might be expected, TPR have not gone so far as to provide specific exemptions from the Code for particular categories of schemes, such as small schemes. However, TPR has acknowledged that for such schemes, proportionality needs to be applied (the ability of small schemes to comply was raised as a concern in the consultation responses, specifically in relation to the “Scheme continuity” module). It has previously stated that trustees must “use their judgement as to what is a reasonable and proportionate method of ensuring compliance for their scheme”.
We expect that TPR’s approach to the application of the Code to small schemes may need to be more fully explained in due course once the practical challenges and costs of complying with the Code are felt on the ground by such small schemes. As always though, provided the governing body is able to clearly demonstrate its decision-making process based on thorough consideration (and after professional advice as appropriate, including legal advice) and after an analysis of cost versus benefit and proportionality, this should help mitigate any risks associated with it taking a scheme specific approach to implementation of the Code.
How will the Code apply to schemes that are, for example, currently winding up or working towards buy-out?
The Code does not specifically address how TPR envisages that schemes that are currently in wind up or are working towards a particular end game such as buy-out, should comply with the Code and to what extent. However, as mentioned above in relation to small schemes, tailoring the approach to compliance with the Code to a scheme’s individual circumstances will ensure proportionality is applied. And again, key to adopting a proportionate approach will be for the governing body to ensure it thoroughly documents all of its decisions in relation to why it took a certain approach to particular aspects of the Code and being able to clearly demonstrate its reasons for doing so.
Sanctions for non-compliance with the Code
Finally, it is worth just briefly mentioning the position regarding any sanctions that may be applied by TPR for non-compliance with the Code. TPR has made clear that there is no specific penalty for failing to follow the Code or to meet the expectations set out in it. So it has no additional powers that can be exercised in relation to the Code beyond its existing powers. However, it has re-iterated that, as is presently the case, it may rely on its Codes in legal proceedings as evidence that a requirement has not been met. And compliance with any of its Codes may be taken account of where it has established groups to issue an improvement or compliance notice.