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The Pensions Regulator’s new General Code of Practice

The Pensions Regulator’s new General Code of Practice

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Good governance is not complicated – and the value it adds when it’s done well is immeasurable.

I have said this before, and those who work with me are aware of my thoughts on this (and to be fair, occasionally laugh at me!). But it’s true, and I’m going to explain why.

Clearly, I can’t write a blog about governance without mentioning the General Code – it’s good news that we now have the final response to The Pensions Regulator’s consultation, and the code of practice itself. This ends a period of uncertainty for trustees, some of whom have used the last couple of years to prepare, and others who have preferred to wait for the final details. While there isn’t a right or wrong approach to this, it’s important to remember that establishing and operating an effective system of governance (ESOG) has been a legislative requirement since 2019. Clearly, further details were required, and trustees now have everything they need.

To box tick or not to box tick?

Every pension scheme is different. While the requirement for an ESOG is laid out in law, how this will look in reality for each scheme could – and should – differ. Each scheme is on its own journey, and common sense, pragmatism, and proportionality need to be applied.

For smaller schemes – or for those on a route through to buy-out in the short to medium term, for example – the look and feel of their ESOG may be completely different, albeit based on the same foundations and expectations laid down by the Regulator. For trustees who may be feeling overwhelmed by the requirements of the General Code, a starting place may be to consider and document the objectives and time horizons for the pension scheme, and how the ESOG requirements overlay this.

The answer to the ‘tick-box’ question lies partly in the motivation behind why it is being asked in the first place. If good governance is viewed negatively, or as a time drain which trustees can ill afford, then the answer is no – governance should not be treated as a tick-box compliance exercise. More education and support are needed to ensure that the right policies and processes are in place, which will ultimately add value. If trustees want to do the right thing but are looking for compliance with the Code, then this is absolutely fine, and the Regulator has gone so far as to say that “We hope that tick-box compliance will represent a greater degree of governance than such a scheme currently receives.”

The final Code brings an increased level of flexibility, particularly with regards to the own risk assessment. The Regulator’s expectation is that the end result will be a useful governance tool, which can be completed to align with the trustees’ own timetables (as long as it happens at least every three years). This allows trustees the space to prioritise specific areas of their ESOG, and align their own risk assessment to their wider objectives.

So what to do first?

Here are my five suggestions for actions you can take now:

  1. Familiarise yourself with the requirements of the Code
  2. Understand when you need to have completed your first own risk assessment
  3. Consider how your strategic objectives may impact the ESOG
  4. Think carefully about proportionality, and the practical application of any policies and procedures in place
  5. Consider the resource requirements – both in terms of knowledge and time

At this point, the road forks into two. Over the past two years, we have been encouraging trustees to complete an analysis of what they currently have in place against the requirements of the draft code. For trustee boards who have competed this work, now is an opportune time to revisit the results based on the final Code, and develop an action plan to maintain their system of governance. For trustee boards who have yet to engage, this should now be prioritised in a proportionate way, and action taken to comply.

I started this blog with my assertion that good governance is not complicated.  Every policy and procedure you have in place needs to meet the same criteria. They must:

  • Be clear and succinct
  • Work for the circumstances of your scheme
  • Work in practice – otherwise it’s not worth having in place, and will never be used
  • Be regularly reviewed
  • Be updated to reflect any lessons learned when things (inevitably) don’t go according to plan

By applying these parameters, you will end up with a useful and pragmatic set of governance tools which will allow you, and your successors, to effectively run the pension scheme and meet the expectations set by the Regulator.