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The new general code of practice

The new general code of practice

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Volume 2024 | Issue 01

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The Pensions Regulator has finally published its new general code, together with the final response to the consultation. The code must be laid before Parliament before it comes into force. This period began on 10 January 2024 and the Regulator confirms the code is expected to come into force on 27 March. The code brings together 10 existing codes and is intended to set out “one set of clear, consistent expectations on scheme governance and administration”.

Background

The Pensions Regulator’s consultation on the draft content for the first phase of this new code of practice ran from 17 March 2021 to 26 May 2021. Initially, the intention was for the first phase to comprise 51 modules within five sections which would replace 10 of the existing 15 codes of practice.

The reason for the new code was primarily due to new governance regulations (transposing IORP II into UK legislation) that required the Regulator to change some of the existing codes. The Regulator also acknowledged that several codes were out of date and the content in the codes and guidance was duplicated.

The governance regulations came into force on 13 January 2019 and amended the internal controls provisions in the Pensions Act 2004 to require trustees or managers of occupational pension schemes (referred to as ‘the governing body’ in the code) to establish an effective system of governance which includes internal controls. The regulations also required the Regulator to include in code(s) of practice, details of the effective system of governance, remuneration policies, and the carrying out and documentation of an own risk assessment of the system of governance (the latter two applying to schemes with 100 members or more).

The consultation on the draft code

The Regulator acknowledges that the consultation on the draft code “was an in-depth and wide-ranging consultation that touched on almost every aspect of running a pension scheme”. Over 100 formal responses were received that comprised some 17,400 separate answers.

The initial response to the consultation was published on 24 August 2021 and was very short. Many of the respondents had asked that the final consultation from the Regulator highlighted the differences between the draft and the final code. Unfortunately, the Regulator has determined that this has not been possible due to the “sheer volume of small changes” and, in some cases, remodelled or retired modules, where detail has been moved.

The highlights

Although there have been a large number of small changes, the general principles and expectations remain much the same in the majority of areas. Improving equality and diversity on trustee boards, while not mentioned in the draft code, has now been covered across a number of modules, with the intention of sharing the responsibility across the governing body.

Where expectations have changed, in a number of instances this is to allow additional flexibility for the governing body – for example, the removal of the requirement to assess fitness and propriety, increasing the review period for service providers from two years to three, and the reflection that shorter, more targeted meetings may be of benefit and, in some instances, more effective.

Remuneration and fee policy

This policy is a requirement of the governance regulations for schemes with 100 members or more. The Regulator acknowledges that the draft module generated many “constructive, although generally negative comments”. As a result, the Regulator’s expectations have been revised.

The scope of the module clarifies that “the remuneration policy should only cover those costs that the governing body is directly responsible for”. This means “where the employer bears all costs, that the remuneration policy will be very short. It is not in any way intended to cover the way in which service providers remunerate their own staff”. Additionally, it “doesn’t have to set out the levels of remuneration paid” nor is there any expectation to publish it.

Own risk assessment (ORA)

The requirement to carry out and document an own risk assessment of the system of governance is another matter that the governance regulations stipulated should be covered in a code of practice. Again, it applies to schemes with 100 members or more.

The Regulator proposed that the first own risk assessment had to be prepared and documented within one year of the new code coming into force, and then subsequently on an annual basis. This proposed timescale and frequency generated a lot of commentary during the consultation period. The timetable was seen as “too onerous” and an annual cycle “would be too much work”. The Regulator acknowledges that the wording in the module about the work being “significant” did not convey the Regulator’s view that this would be the case for those schemes that did not already meet expected standards.

The Regulator has “relaxed our expectations for the frequency of the ORA”. Schemes can “complete an ORA on their own timetable, and in part or in whole, provided it is carried out in its entirety at least every three years”. The timing of the first ORA is now linked with that in the governance regulations – with the first one being prepared within 12 months of the last day of the first scheme year after the code is issued.

Next steps

Over the past two years, trustees have been encouraged to complete an analysis of their governance arrangements against the requirements of the draft code. For trustee boards who have completed this work, now is an opportune moment 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 proportionately, and they should take appropriate action accordingly.

Ultimately, the Regulator explains that “trustees of schemes unable to meet our expectations should consider whether defined contribution savers would be better off in a larger, better-run scheme, and whether defined benefit 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.”