The Regulator is consulting on a new consolidated Code of Practice that will, as it stands, replace 10 of its existing Codes. The new Code will also introduce the necessary requirements that were legislated for as far back as 2018 in the Occupational Pension Schemes (Governance) (Amendment) Regulations.
A broad scope
The new Code will apply broadly to private sector occupational pension schemes and to those aspects of public service schemes and contract-based schemes that are subject to regulation by the Regulator. In time, this single integrated Code will replace all 15 of the current Codes but, mainly because of changes following the newly enacted Pension Schemes Act 2021, five of the current Codes are out of scope for now. These relate to notifiable events, funding defined benefits, modification of subsisting rights, the material detriment test and master trust governance.
Objectives of reform
The replacement of the existing Codes is more than a simple consolidation, as the overall aim is to make information easier to access, understand and act on. This is achieved using shorter, topic-focused modules (there are 51 of them) with links to related modules and, in time, to relevant guidance.
Substantive new provisions
The draft Code brings in new provisions that will require the attention of trustees and others.
Effective systems of governance
Trustees are required to have an effective system of governance that must be proportionate to the size, nature, scale and complexity of the scheme’s activities. Matters falling into this area include:
Many of these areas may be familiar but the new focus will require arrangements to be re-evaluated.
Remuneration policy
For schemes with 100 or more members, trustees should establish a remuneration policy with a written record of it published on the scheme website or otherwise made available to members. It should apply to all people or corporate bodies who effectively run the scheme and those who carry out key functions or whose activities materially affect the scheme’s risk profile.
Own Risk Assessment (ORA)
An ORA is different from a risk register or the usual risk assessment in that it is an assessment of how well the scheme’s governance systems are working. It is, therefore, closer to a backward-looking audit rather than a forward-looking exercise. It should cover:
For schemes with 100 or more members, the trustees must prepare their first ORA within one year of the new Code coming into force and then produce subsequent ORAs within 12 months of the last ORA. This is a change to the legislation, which only required an ORA to be a triennial exercise. It is possible that representations may be made to the Regulator on this point of the Code.
Data, IT systems and cyber controls
There is a greater focus on cyber risk in the Code and this means ensuring that internal control processes cover the systems that are used meet the scheme’s current needs and legal requirements. A review mechanism is required to make sure that they are kept up to date with any required software and hardware updates.
Investment provisions
The Code has detailed new provisions on stewardship, climate change risk and implementation reports, building on the recent new regulation of investment practices in this area. It also notes how an effective system of governance should ensure that consideration of environmental factors is part of the governing body’s investment decision making process. Future steps
Once the consultation closes on 26th May 2021, the Regulator will need time to review the feedback. We suspect that it may not be until the end of this year at the earliest that the Code is laid before Parliament, with a further delay before it can be finally promulgated.
Capita comment
Although the new Code is out for consultation and it will be a while before it is finalised, we think that trustees should not wait to act. Instead, it will be much wiser to check internal systems and governance processes against the expected requirements now. This will allow time to organise plans and resources to address any identified changes that need to be made. Trustees should look at obtaining support in configuring any additional governance processes and producing the required documentation.
Please speak to your usual Capita contact if you wish to know more.