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Speaker
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Transcript
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Helen Cracknell, Solicitor, Burges Salmon
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Hello everyone, my name is Helen Cracknell and I'm a solicitor in the Pensions team, and welcome to episode five the Burges Salmon Pensions Pod. In our last episode we looked at key trends in the current pensions landscape, with a particular focus on DC transfers to master trusts. If that sounds of interest make sure to check out our website.
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Chris Brown, Director, Burges Salmon
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Hello everyone I'm Chris Brown, a director in the Pensions team. In today's podcast we will be discussing the upcoming single code of practice. Our guest today is Susannah Young, a partner in our Pensions team, who advises on all areas of pensions law with a particular focus on supporting trustees with governance requirements. Sue, welcome to the podcast.
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Susannah Young, Partner, Burges Salmon
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Hi Chris, hi Helen, very good to be here thank you.
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Chris
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Sue, there's been a huge increase in governance requirements and regulatory focus on governance, what is the single code in short?
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Susannah
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Well you're right Chris that there has been an awful lot around governance in recent years, but that's for the very good reason that it is of course absolutely critical. Good governance means that everything is running smoothly and that trustees can be prepared for surprises, so for example the departure of a key person or an unexpected market event or obviously COVID in recent years.
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Chris
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Absolutely yes.
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Susannah
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It's really not surprising that the Pensions Regulator has been very focused in recent years on improving the governance of pension schemes, particularly those in the defined contribution arena and news for auto enrolment. And the purpose of the single code is to bring everything together, really get trustees to focus on the importance of good governance across all schemes and to help schemes improve where required.
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Helen
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Thanks Sue, so obviously I think our listeners will know that the Regulator consulted on the code of practice last year which closed on the 26th of May. Could you tell our listeners what that was about?
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Susannah
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Yes so this was sort of badged as a singular modular code of practice, often referred to as the new combined code which will in time replace its 15 existing codes of practice. So an awful lot of paperwork there, I think it will be handy to have everything in one place. Importantly as well it also incorporates changes introduced by the 2018 governance regulations which stem from IORP, so some of the stuff in there is new it's not just a consolidating code. In due course when it's finalised it will be published online, so it will be easy for schemes to access and regularly updated as well, and the idea is that it will provide one consistent source of information on scheme governance management and operations.
Having said that there was quite a lot of pushback in the consultation responses, especially around some of the new stuff, and the Pensions Regulator is currently gathering all that feedback together, considering it and thinking about whether or not any changes need to be made.
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Helen
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No definitely, just in terms of timings, obviously the Regulator published its interim response on the 24th of August last year, but it has confirmed that it doesn't expect to produce the final version of the code before spring of this year, meaning the earliest it will come into force is likely to be this summer.
So although it's unlikely to change significantly we just thought we'd give the overview today but it is a wait and see at this point.
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Chris
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Yeah absolutely, it's wait and see and Sue, you mentioned that there was a lot of a pushback in the consultation responses, it's a big document and before we get into what's in the single code, there's been a bit of pushback, is it going to be legally binding? Can you tell our listeners, do trustees have to follow it?
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Susannah
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Yes that's a really good point Chris, I mean it's not legally binding in the same way that regulations are, but following it is the best way of evidencing that you're complying with the underlying legal requirements. And it is helpful because it provides practical guidelines on how you can comply with those legal requirements and it also sets out TPR's view of the standard of behaviour it expects from trustee boards, and in many instances actually in the code TPR isn't prescriptive about the particular methods a trustee board should use to meet those standards, and in fact it's quite helpful sort of signposts throughout the difference between the legal duties which TPR sort of prefaces with the word 'must', versus TPR expectations, which are indicated with the word 'should' and you're right it's not necessary for all of the provisions of the code of practice to be followed in every circumstance, but what trustees do need to do is actually think about how they are practically speaking complying with those requirements and be prepared to set out what the alternative approaches they are taking are.
So you can't just ignore that legal requirement, clearly you do need to show you are complying with it and this is a useful kind of guide as to how you might go about doing that.
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Chris
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Yes and how the alternative approaches comply with the underlying legal requirements set that out as well.
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Helen
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Just going on to talk about the actual structure of the code itself, it does have five sections, so the governing body, funding and investment, administration, communications and disclosure and reporting, so each section is then broken down into a number of smaller modules and there are 51 modules in total.
New code uses the term governing body to describe everyone involved in running the pension scheme, so trustee boards mostly, but also would capture those involved in running public sector schemes. And the code, as Sue said, said contains significant new governance expectations, so also structures and functions most schemes will have to make some changes to their current governance arrangements, but the code does make the point to say that there should be proportionality in the trustee's mind, so there is flex for schemes to apply its expectations in a way that works for its own particular circumstance.
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Chris
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Yes absolutely.
So should we hone in on some of the specific areas, Sue please can you pick out some of the key points to tell our listeners about?
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Susannah
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Well of the areas Helen has mentioned it covering, I think the governing body module is worth focusing on because that sets out how the Regulator suggests schemes should meet the detailed governance requirements,
which were originally outlined in the governance regs 2018, which as I mentioned were enacted in response to the ielts ii directive, and risk management is a major focus here and there are two major new concepts for schemes to get to grips with in the combined code, and unfortunately there's yet another acronym to add to your paper, as if we didn't have enough already, which is ESOG, I don't know if people are calling it esog, but it stands for Effective System of Governance, and that's the collection of factors that together make for a well-functioning pension scheme.
And the Regulator will expect schemes to maintain their effective systems of governance by reviewing each element in turn at least every three years, and then allied to that schemes with a hundred or more members will be asked to produce what's called an own risk assessment of their effective system of governance so you're having to do an annual check on what you are doing to ensure that all the controls and mitigations that you've put in place as part of your effective system of governance are actually working and are robust.
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Chris
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Yes okay, so two major new concepts and an ESOG and own risk assessment, so Sue what does the regulator say that an effective system of governance looks like?
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Susannah
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Well as you know we've already got internal controls and schemes you need to have systems of governance and internal controls that give you, as trustees or the management scheme, oversight of the day-to-day operations of the scheme, it should also include any delegated activities, for which you as trustees remain accountable, so administration is the obvious one here, and it should provide you as a trustee board with assurances that your scheme is operating correctly and in accordance with the law. And then in relation to each element, trustees are going to need to establish and maintain policies and what I would say, Chris and Helen, is that it's likely that a lot of schemes will already have at least some of these policies in place, but definitely schemes need to be reviewing the code in order to identify which of those policies they may need to refresh, and also any which they have missing and which they will need to create.
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Helen
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You're so right Sue, one of my big clients they've brought together all of their policies, of which there are many, and they're deciding whether they can kind of condense those down in accordance with the new code, but obviously it's not come into force yet so it would be more of a future project, but it's really interesting that trustees are looking to get advice and guidance on this already. I've noticed, obviously, clients talking about the ESOG, but also the own risk assessment, could you tell us more about the own risk assessment, Sue?
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Susannah
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Yes, so this is something which trustees will first be required to produce within 12 months from the date that the code comes into force so not something for this year, much more likely next year, and the own risk assessment is effectively the process by which trustees are going to demonstrate that they've fully considered the various risk management processes which are part of their effective system of governance.
So I guess schemes may have similar in place already with their risk registers, but this this is a bit different. It's going to be an annual process and trustees will also have to undertake it whenever there's a material change in the risks facing the scheme or its governance processes.
The good news, I think, is that it doesn't need to be published or submitted, but like with many of the policies, such as around conflicts of interest etc., if the Regulator did ever have cause to become involved on your scheme, for example in the context of some sort of scheme funding issues or something, it could ask to see it and so trustees should definitely keep a record of it. In particular it needs to cover how trustees have assessed the effectiveness of each of the policies and the procedures covered by the own risk assessment, and it also needs to comment on whether or not trustees consider that the operation of those policies and procedures has been effective and why.
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Chris
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Well thanks Sue. So there's a bit of points to think through as to the content there, what you've said about the effective system of governance and the own risk assessment, it sounds like quite a bit of work for trustees to do. How can our trustee listeners get ready for this, Sue, we've had a number of clients asking for trustee training on it, and starting to get prepared?
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Susannah
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Training is an absolutely brilliant start and starting to think about how to get prepared. Reassuringly the regulator has said that the own risk assessment should be proportionate to the complexity scale and structure of the scheme and the risks to which it's exposed, and as I said earlier I think a lot of schemes will have a good deal of the groundwork already in place.
Nevertheless, good idea to start preparing now though, Helen as you mentioned your client is doing, I'm seeing clients scheduling in a review of their policies and procedures by way of preparation, and that will make it easier when the code's finalised and actually here at Burges Salmon we've developed a free checklist that can help trustee boards identify what policies will be required and then that is an easy way to help them identify any gaps.
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Helen
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Really worth mentioning the checklist there Sue, and as you say people can reach out and ask for that. You also mentioned previously that there are some new items expected to be within the single code, what are those?
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Susannah
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Yes, there's the separate DB funding code which we're still waiting finalisation on, on the investment front probably not surprisingly there's a lot of new content around stewardship and climate change that the trustees will need to familiarise themselves with, obviously with the support of their investment consultants. So on that front, by way of example, trustees will need to assess you know how you assess investment risks relating to climate change, the use of resources and the environment, how trustees go about assessing social risks to the schemes investments, so for example monitoring fund managers stewardship policies and compliance, and also how you go about ensuring the security of assets and liquidity when they're required.
The other new element in there which has caught quite a lot of attention is the need for a trustee remuneration policy, now of course not all trustee boards have any remuneration at all but a number a number do, and it can vary by trustee, so this policy must set out the level of means for remunerating any trustees, but it doesn't need to actually detail, I don't think, exactly what everyone has paid, rather it should contain an explanation of the decision-making process for the levels of remuneration and why they're considered to be appropriate. And of course it's not just trustees, it also needs to consider any outsourced service provider and that is actually one which will need to be published on your scheme website or otherwise made available to scheme members, so I can see that being quite an area of focus for a number of boards.
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Helen
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Thanks Sue, I agree, also something that's been spoken about quite a lot is cyber risk, so trustees needing to take steps to reduce the risk of incidents occurring, but also be able to appropriately manage incidents when they do arise.
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Susannah
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I was having that discussion in a trustee meeting yesterday, and actually usefully there they're sort of really working closely with the employer and trying to make use of their expertise in the area as well.
In addition to that, maintenance of IT systems is really important, and again a lot of this is going to involve trustees linking with their service providers and testing them as to whether or not they're able to demonstrate that they can meet all of these new sort of regulatory expectations.
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Helen
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I think just the last one to mention is obviously pension scams, that's been massive in the industry over the last few years, and as trustees needing to make sure they take appropriate steps to mitigate the risk of a scam occurring for their members, and also I guess the new transfer conditions that came out last year, a really good way of doing that.
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Chris
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Yes, definitely. So lots to think about, Sue if you could sum up one key thing that trustees can be doing now to get ready, then what would it be?
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Susannah
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Well I really do think that our checklist is a good starting point that can help trustees review any areas of non-compliance with the code, they can then consider any immediate actions required and start to agree a timetable for further actions which can be built into the business plan, because we do have a number of months to get this underway.
I suppose as a practical tip, it might be quite helpful to consider the use of a trustee subcommittee, perhaps a governance subcommittee, as there will certainly be a lot to do behind the scenes to get ready for all of this.
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Chris
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Yes absolutely, there is going to be a lot to do. Thank you for coming on the podcast Sue, and sharing your thoughts with us. If you've enjoyed listening then we'd be delighted to discuss anything to do with the single code further with you.
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Helen
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Thank you everyone for listening to the Burges Salmon Pensions Pod. If you'd like to know more about our Pensions team and how our experts can work with you, then contact myself, Chris or any of our team via our website.
Our next episode is yet to be decided but we think we're going to be looking at key pensions cases, so make sure to check that one out, and all of our episodes are available on Apple, Spotify or wherever you listen to your podcasts.
Don't forget to subscribe, and thanks for listening.
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