UK regulator launches code of practice consultation

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The Pensions Regulator (TPR) in the UK has launched a consultation on the draft content for a new code of practice that will replace 10 of its existing codes.

The consultation, which closes on 26 May, will begin the process of replacing TPR’s existing codes of practice (COPs) (see table for COPs that have been replaced by the new code in this phase).

“Running a pension scheme is an increasingly demanding task in an environment that is constantly changing and growing in complexity,” TPR said in its consultation document.

The landscape of pension saving has seen “seismic changes over the past decade”, it said, adding that the continuing shift from defined benefit (DB) to defined contribution (DC), the rise of master trusts, and success of automatic enrolment have created new pressures for pension schemes.

“The number of pension savers has increased massively, as have the standards expected of those running the schemes. Trustees and scheme managers need to have the right people, skills, structures and processes in place to facilitate scheme operations, enable effective and timely decisions, and to manage risks appropriately. Our COPs and guidance provide the support needed to be able to achieve this,” the regulator said.

The Department for Work and Pensions (DWP) chose to transpose the changes from the second European Pensions Directive (IORP II) to UK legislation in governance regulations. These governance regulations came into effect from 13 January 2019 and required TPR to change some of its existing COPs, it explained.

It also required the regulator to introduce new expectations in some areas, such as the introduction of an “effective system of governance”. The new code addresses those requirements.

Code of practice	Code in force	Part of new code
01: Reporting breaches of the law	April 2005	yes
02: Notifiable events	April 2005	no
03: Funding defined benefits	July 2014 (GB) July 2015 (NI)	no
04: Early leavers	May 2006	yes
05: Reporting of late payment of contributions to occupational pension schemes	September 2013	yes
06: Reporting of late payment of contributions to personal pension schemes	September 2013	yes
07: Trustee knowledge and understanding (TKU)	November 2009	yes
08: Member-nominated trustees/member-nominated directors – putting arrangements in place	November 2006	yes
09: Internal controls	November 2006	yes
10: Modification of subsisting rights	January 2007	no
11: Dispute resolution – reasonable periods	July 2008	yes
12: Circumstances in relation to the material detriment test	June 2009	no
13: Governance and administration of the occupational trust-based schemes providing money purchase benefits	July 2016	yes
14: Governance and administration of public service pension schemes	April 2015	yes
15: Authorisation and supervision of master trusts	October 2018	no

_{Source: The Pensions Regulator}

The regulator is seeking responses from trustees, managers of occupational and personal pension schemes and scheme managers, advisory boards and pension boards of public service pension schemes.

It said it is also “particularly interested to hear from non-professionals, such as member-nominated and lay trustees, and whether they find the new code easier to use and understand.”

“The new code signals some significant changes in approach, which in turn will mean significant changes in pension scheme practice – although more for DB than DC schemes,” said Susan Hoare, partner at consultancy Aon.

“Having a code of practice all in one place is very helpful from a user’s perspective. Ten of the existing codes of practice have been amalgamated into this single modular code (Supercode) which is presented as 51 concise modules. This has allowed TPR to remove a lot of duplication; for example, if you currently search for ‘Conflict of Interest’ on TPR’s website, there are a number of different places where it sets out what it means by this,” she said.

However, some of the benefit of the concise modules is lost in combining the codes of practice for both private sector and public service pension schemes, she noted.

Intermingled in any one module are the differing requirements for both, with the terminology switching between trustees, scheme managers or governing bodies, she said.

“Overall, we see the code as more directive in style, with TPR spelling out clear expectations at the end of each module. While this is a tidying-up exercise, we would recommend that pension schemes check compliance with each of the expectations,” she added.

”While this is a tidying-up exercise, we would recommend that pension schemes check compliance with each of the expectations”

Susan Hoare, partner at Aon

The introduction in the draft code of the term ‘Governing Body’ is a “helpful broadening of the usual reference to ‘trustees’ and recognises the increasingly diverse range of pension scheme oversight bodies responsible for good governance of pension arrangements”, said Laura Andrikopoulos, head of governance consulting at Hymans Robertson.

She also welcomed the enhanced focus on the quality of risk management – a consequence of the transposition of the IORP II regulations into UK practice.

The regulator expects schemes to publish on a website the remuneration policy for trustees and supporting staff. Also, they should have a comprehensive annual “Own Risk Assessment” report that is available to scheme members. There are also new sections on governance, stewardship, IT systems and cyber risks.

“The Own Risk Assessment annual process will bring a much-needed focus on current risk management practices which have been under scrutiny in the last year due to the materialisation of a major risk to business continuity in particular (COVID-19),” Andrikopoulos said.

Mike Smedley, partner at Isio, said, however, that much of this content had previously been refered to by the regulator “but was often buried in long and frankly largely unread documents”.

“The tone now is much stronger and directive about what the regulator expects from trustees. It will be interesting to see how much the industry push back – many of the requirements are not set out anywhere in law but are simply the regulator’s view of good practice,” he said.

Defined contribution schemes

John Foster, partner at Aon, agreed that the implications of the new code will be greater for DB schemes than for DC, “but it is significant that DC currently has a standalone code that was the product of a lot of good work by both TPR and the industry”.

The requirements for DC are now dispersed throughout the new single code.

“At a time when the governance demands on trustees of DC schemes are increasing, it will be interesting to see if this proves to be counter-productive to the aim of simplifying the process for DC trustees – and whether this becomes another reason for schemes to consider alternative structures for their DC arrangements,” he said.