The long-awaited General Code of Practice (“the Code”) was laid in Parliament on 10 January 2024 and is expected to come into force on 27 March 2024. It sets out the Pensions Regulator’s (“the Regulator’s”) expectations of the “conduct and practice governing bodies should meet to comply with their duties in pensions legislation”. The Code is similar to the single code of practice first consulted on in 2021, though some small changes have been made since then.
The Regulator has confirmed that there is no specific penalty for failing to comply with the Code, however it may rely on the Code and other codes of practice in Court to evidence that a requirement has not been met.
The Code combines 10 existing codes of practice into one set, as shown in the following table. The existing codes of practice falling under the new Code will be erased in their entirety.
The Code is split into 51 smaller modules and sets out, among other things, what issues should be considered by trustees of pension schemes when completing their Effective System of Governance (ESOG).
ESOG
There has been a legislative requirement for an ESOG since 13 January 2019, when the Occupational Pension Scheme (Governance) (Amendment) Regulations 2018 introduced a requirement whereby “trustees or managers of an occupational pension scheme must establish and operate an effective system of governance”. The ESOG should be “proportionate to the size, nature, scale, and complexity of the activities of the scheme” and should be regularly maintained and updated if necessary.
The ESOG should include processes and procedures to ensure compliance with the modules set out in the code. Some modules only apply to schemes with more than 100 members, though the Regulator has said that smaller schemes may wish to adopt the principles as good practice. In addition to combining various aspects of existing codes, the new general code also includes expectations on areas such as climate change and cyber security.
A list of the areas covered is set out below:
Own risk assessment (ORA)
In addition to having an ESOG in place, schemes with 100 members or more must carry out and document an ORA as part of the ESOG. The first ORA needs to be completed within 12 months of the end of the first scheme year which begins after publication of the Code. For example, a scheme with a year end date of 31 March must complete their first ORA no later than 31 March 2026. Subsequent ORAs should be carried out at least every three years, or earlier if there are material changes to the ESOG or to the risks faced by the Scheme. The Regulator has confirmed that for now there will be no template or guidance for completing the ORA, but this will be kept under review.
How the Code will apply to different schemes
The Regulator has not provided specific advice on exemptions from the Code for particular schemes, however it has stressed that the Code should be dealt with in a proportionate manner and has said that trustees must “use their judgement as to what is a reasonable and proportionate method of ensuring compliance for their scheme”. This means that smaller schemes, and schemes which are currently winding up or close to buy-out, might take a different approach to the Code compared with other schemes. It is important that trustees thoroughly document all decisions made concerning why they took a certain approach to the various modules and aspects of the Code. Trustees should also be able to demonstrate clearly their reasons for making those decisions.
Summary of Recommended Actions
The code explains that the Regulator will permit some flexibility as it acknowledges that each scheme is different, and an element of proportionality may be used when assessing the governance needs of each scheme. If you have any questions on how to identify the areas which need to be improved upon to ensure compliance with the code, please contact us to discuss this in more detail.