The Pension Regulator’s latest General Code of Practice comes into force today, outlining new requirements for governing bodies aimed at bolstering risk management in pension schemes.
Under the regulations, pension schemes are mandated to establish an Effective System of Governance (ESOG) and conduct an Own Risk Assessment (ORA) for schemes with 100 members or more. These assessments are designed to evaluate the effectiveness of governance systems, identify risks, and implement mitigation strategies.
Pension schemes are preparing for new regulations, and conducting gap analyses to ensure compliance with the Code’s obligations. According to WTW’s Code Assessment Tool (CAT), preliminary evaluations show an average alignment score of 87 per cent, indicating strong governance models among trustee boards. Scores range from 72 per cent to 96 per cent, demonstrating significant adherence across schemes.
WTW head of governance consulting Jenny Gibbons says: “This data is a testament to the dedication of the trustees and managers of these schemes towards maintaining high standards of governance and should be reassuring to members involved and the Pensions Regulator. While the majority exhibit commendable levels of compliance, there is always room for improvement, and improvement is always worth striving for.
“It is important to remember that ‘proportional’ in relation to the Code doesn’t mean aiming to do less in all areas. For example, a bought in scheme looking to buy out may have less to do with investment governance but should arguably be boosting time spent on strategic, legal and data related governance issues and ensuring the board itself is fighting fit to see the scheme through to buyout”
Soon after the final Code was published in January 2024, Aon polled more than 300 pension plans to determine how prepared they were for its execution. They were especially interested in learning about the higher standards for risk management in pension plans.
The findings showed that 80 per cent of the schemes that were polled expected the ‘risk management function’ to be performed by the Trustee Board or by an already-existing subcommittee. Of those surveyed, 40 per cent said this duty should go to the Trustee Board, and 40 per cent thought it should fall to an already-existing subcommittee. Furthermore, 12 per cent of respondents said they were unsure of the organisation in charge of doing this work.
Aon’s survey also examined the types of assurance reporting that the same pension schemes planned to use for internal controls. Of those, 69 per cent expected to rely on reports from third parties, 43 per cent planned to use internal audit services, 24 per cent envisaged using statutory auditors with a wider mandate, and 27 per cent intended to hire an outside party to audit their internal controls.
Aon UK Retirement partner Sarah Butlin says: “It is encouraging that trustee boards have started thinking about how they will tackle these aspects of their risk management. A well-established risk framework and audit trail will be key to the effective system of governance and preparation of the ORA.”
Sackers managing partner Helen Ball says: “As Parliament closes its doors for the Easter recess, the General Code comes into force. This starts the era of effective systems of governance and own risk assessments and is a significant moment for schemes. That said, and as the Regulator promised, the Code is a part of the evolution of scheme governance rather than a revolution as most of the contents of the Code reflect existing legal requirements and what was covered in the Codes of Practice that have been replaced.
“The Code provides schemes with a governance road map and makes the Pensions Regulator’s expectations clear, and as schemes begin to use the Code, we are seeing that it is a helpful reference point for checking that they have all the governance measures in place that their scheme needs and that it helps with addressing the newer areas too.
“Good governance helps everyone linked to a scheme. It assists trustees in running their scheme effectively, it benefits members by maximising the chances of good outcomes for them and it helps employers because it ensures that their support is used effectively and strategically. We would encourage all schemes to engage with the Code and to consider how the Code can support the operation of their scheme.”