Pensions Regulator consults on single code of practice

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The Pensions Regulator (the Regulator) has launched a consultation on the first phase of its work codifying its existing 15 codes of practice into a single code. The code will apply to the governing bodies of occupational, personal and public service pension schemes. The aim is to have an online code which brings together and updates all relevant information on scheme governance and management in a clearer and more user-friendly way. 

The draft code runs to 149 pages (reducing by nearly a half the number of pages of the codes that have so far been consolidated) and consists of 51 shorter, topic-based modules which replace 10 of the existing codes of practice. The new code deals principally with governance and administration including the governance requirements introduced by the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 (the Governance Regulations). The modules are contained in five sections: the governing body, funding and investment, administration, communications and disclosure, and reporting to the Regulator. 

The draft code does not simply replicate the current content of the existing codes – in some instances new content and expectations have been added and, in other parts, additional material has been included. For example, the role of the 'governing body' is new content, cyber security is more detailed, and stewardship of investments and climate change modules have been added. There will also be a requirement for schemes (but not occupational schemes with fewer than 100 members, public service or authorised master trust pension schemes) to have a remuneration policy and there is a module dealing with this. 

Although it may be some time before the draft code is finalised, trustees should begin preparing by reviewing their existing internal controls and procedures and comparing them against the code so that they can assess what changes might be required. 

The Governance Regulations and the draft code

An effective system of governance

The Governance Regulations build on the previous requirements for trustees to maintain adequate internal controls. They require schemes to establish an effective system of governance proportionate to the size, nature, scale and complexity of the scheme. 

Each module in the draft code sets out what the Regulator's expectations are as regards having a 'minimum' effective system of governance and trustees will need to ensure that they review their scheme’s procedures and controls to check if they comply. 

An 'own risk assessment'

The Governance Regulations also require private sector schemes with 100 or more members to conduct an 'own risk assessment', a regular documented assessment of the effectiveness and risks of the scheme's governance system. 

This is perhaps the most notable development in the code and the Regulator comments that the first assessment will be a 'significant piece of work', albeit it should be proportionate to the circumstances of the scheme. The code lists relevant matters which should be considered. 

Schemes will have 12 months from when the new code comes into force to produce the first documented assessment and will need to undertake further assessments annually, or following a material change in risks or governance processes.

The Regulator's expectations

To address difficulties that stakeholders have found in locating details of the Regulator's 'expectations' in the existing codes, most expectations will be set out in the new code in list form. However, the Regulator warns that these should not be treated in a 'tick-box' fashion and are not exhaustive of all the requirements which schemes may need to meet. The distinction between legal duties and the Regulator's expectations is made using the words 'must' and 'should' respectively.

Where have the new code modules come from? 

A table which illustrates where the new code modules have come from in the existing codes has also been produced.

What about the extended Regulator powers introduced by the Pension Schemes Act 2021? 

There are no modules in the draft code which 'draw' from the new legislation as these will be introduced at a later stage. 

What about the other codes? 

The five codes which are not yet being replaced (notifiable events, scheme funding, modification of subsisting rights, material detriment and master trusts) will be incorporated in due course. Planned changes to existing codes such as the defined benefit scheme funding code will also be included. 

Next steps

The consultation closes on 26 May 2021. The move to a single code is being introduced in phases – a review of the regulatory guidance (around 200 pieces) will begin later this year. There will also need to be a significant redesigning of the Regulator’s website. 

Having all of the Regulator's codes in one place should make it far easier for trustees to navigate but the extra work that the single code may require, at least for some schemes, may not be as welcomed especially given the other recent legislative and regulatory developments that trustees are having to deal with at the same time.

Nevertheless, although it will be some time before all the various phases of this project will be complete, trustees should begin to familiarise themselves with the draft code now so that they can gauge the extent of work that might be required and be in a good position to undertake this when the code is live.

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