46: TPR consults on combined code of practice for pension scheme governance

TPR has launched a ten-week consultation on the first phase of work to transform its fifteen current codes of practice into one new online code. The consultation asks for views on the consolidation of ten of the existing codes which deal mainly with governance and administration. Responses must be submitted by 26 May 2021. TPR expects further consultations will be issued in due course on the integration of tth he five remaining codes of practice.

TPR’s first phase consolidated code of practice consists of 51 shorter modules covering the following topics: funding and investment, the governing body, administration, communications and disclosure, and reporting to TPR. It is designed to be web-based, with an interactive approach and an improved search facility.

The benefits of the new code include improved consistency and clarity, a reduction in page count by nearly a half, better cross-referencing to guidance, a statement of TPR’s expectations in relation to each module, and clearer separation of legal duties and expectations. The new code covers all types of schemes, including public sector schemes, albeit TPR recognises that public sector schemes are governed by different legislation which creates different expectations.

‘Own risk assessment’

The combined code also incorporates changes to the Pensions Act 2004 that were introduced in 2019 by the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 which require trustees of private sector schemes to have an effective system of governance proportionate to the size, nature, scale and complexity of their pension scheme. The governance regulations in turn transposed certain requirements mandated under the EU’s IORP II Directive.

It is worth remembering that schemes with less than 100 members need to meet seven governance requirements relating: to sound and prudent management, an adequate and transparent organisational structure, effective internal controls and communications, consideration of ESG factors related to investment, continuity and contingency planning along with regular internal reviews.

In addition schemes with 100 or more members must also consider risk management, the actuarial function, outsourcing, internal evaluation of effectiveness and adequacy and have written policies on these plus a trustee remuneration policy.

The combined code, now makes clear the requirement for private sector schemes with 100 or more members to carry out an ‘own risk assessment’ to clarify how well their policies and procedures address financial and operational risks. TPR also encourages smaller schemes to consider whether to adopt the assessment (or elements of it) as a best practice approach to governance.

The first own risk assessment must be completed within twelve months of the new code coming into force. It must then be reviewed annually, or whenever there is a material change in governance processes or in the risks facing the scheme.

TPR stresses that the assessment should not be perceived as a ‘tick box’ exercise albeit there is no requirement for schemes to submit their assessment to TPR or to make them public. It is expected that trustees may need to start preparing their first own risk assessment some time in 2022.

Once this new single code of practice comes into force, the codes that are being replaced will be revoked. TPR has stressed that the new code will be subject to continual review and amendment to reflect legislative and policy change. For example, changes arising from the provisions of the Pensions Scheme Act 2021 will be included in later phases.

Comment

The own risk assessment adds a different level of governance obligations to pension scheme agendas. Trustees are advised to use this draft code of practice to begin the process of assessing the nature, scale and complexity of their pension scheme to determine how the governance obligations apply and whether they can comply with TPR’s expectations and the requirement to demonstrate an effective system of governance.

Our pensions team would be pleased to provide training or advice in relation to governance obligations and the combined code.