Many pension schemes will already have implemented appropriately robust governance mechanisms, however, the introduction of the new Singular Code will require trustees to review and enhance traditional processes. For example, the new written policies in key areas such as:
- Remuneration policies for those who run the scheme.
- The appointment of advisors and providers.
- Continuity and succession planning for trustees, advisors and providers.
- The identification and management of advisor conflicts.
Although many Trustee Boards will have some of these mechanisms in place, the arrangements may not be formally written anywhere. There will also be many business’ pension schemes that are yet to put these in place, so they need to start thinking about implementation.
What does The Pension Regulator’s new Singular Code mean in practice?
The Regulator’s Combined Code was published for consultation in early 2021. The Combined Code is expected to become effective in late 2022 which means it’s important to review your pension scheme with urgent effect.
When the code takes effect, schemes with more than 100 members will be required to follow it. And, although the code has not yet been published in its final form, it will require schemes to consider their ‘Effective System of Governance’ (ESOG) and conduct their ‘Own Risk Assessment’ (ORA) on an annual basis. Further details around pension scheme regulation can be found here.
What is an Effective System of Governance?
To understand what an ESOG is, let’s take a look at the legislation. That takes us back to the Statutory Instrument (SI) that sets out what the Code of Practice must cover:
- Sound and prudent management of activities.
- Adequate and transparent organisational structure with segregation of responsibilities.
- An effective system for ensuring transmission of information.
- An effective internal control system.
- Continuity and regularity in the performance of its activities, including the development of contingency plans.
- Consideration of environmental, social and governance factors related to investment assets in investment decisions.
- Subject to regular internal review.
What is an Own Risk Assessment?
The Combined Code is expected to introduce the requirement for the trustees to complete an ORA within 12 months of the code being published. The ORA must then be updated on an annual basis, and this is the area where trustees are going to need to ensure that they are preparing as early as possible.
Even if the Combined Code is subject to correction as a result of the consultation responses, the underlying legislation is quite clear in the requirements for the ORA:
- Integration of the ORA into management and decision-making processes.
- Assessment of the effectiveness of the risk-management system.
- Prevention of conflicts of interest.
- Assessment of funding needs, including the recovery plan.
- Assessment of risks to members and beneficiaries in relation to benefits being paid.
- Assessment of mechanisms protecting retirement benefits.
- Assessment of operational risks.
- Where ESG factors are considered, assessment of new or emerging risks.
- Timing of the first ORA.
- Timing of subsequent ORAs.
Where is your pension scheme on its governance journey?
Step 1. Training for schemes
Step 2. Gap analysis
Step 3. Gap analysis complete – what next?
How can RSM help?
Across our various service lines, our skilled team of pension consultants and governance professionals have extensive experience of:
- working with trustees in various governance areas; and
- approaching governance from audit, covenant assessment and risk assessment perspectives.
Our pension advisory services are in place to help our clients achieve compliance with the 2018 Governance Regulations and feel assured that the business is meeting the guidelines necessary.
For more information on pension scheme governance, please get in touch with a member of our team.