DWP published the DB Funding Regulations

The final version of the Defined Benefit (DB) Funding Regulations were published by the DWP on Monday this week alongside the response to its 2022 consultation.  The purpose of the new Regulations is to implement the requirements of the Pension Schemes Act 2021 for DB schemes to establish and maintain a formal funding and investment (F&I) strategy and submit a written statement (the Statement) of that strategy to the Pensions Regulator (TPR).  The regulations are due to come into force on 6 April 2024 and will apply to scheme valuations with effective dates on or after 22 September 2024.  TPR’s new funding code (the Code), which is designed to complement the new Regulations, is expected to be published in the coming months following its second consultation which ended almost a year ago.

Changes made to the Regulations following the consultation centre, in particular, on an attempt to “anchor” flexibilities described in the draft Code that the DWP say were always intended.  For example, the DWP asserts that the Regulations do not intend to constrain actual investments and even mature schemes can invest in a wide range of assets.  Also, it claims that the changes should provide assurance that the investment in the sustainable growth of sponsoring employers’ businesses is a matter to consider alongside the affordability principle.  For open schemes, it is confirmed that new entrants and future accrual can be taken into account in determining when “significant maturity” will be reached.

The Regulations describe the matters that trustees must take into account in their F&I strategy.  The key plank of the F&I strategy is a requirement for schemes to have reached a state of “low dependency” on their sponsoring employer by the time they are “significantly mature”.  Overall, the details are largely unchanged from the draft Regulations, but there is some clarification on scheme maturity aspects.  For instance, to counter concerns raised that using the duration of liabilities as the measure of scheme maturity can be volatile in changing market conditions, the Regulations now prescribe a fixed date of 31 March 2023 on which economic assumptions used to calculate maturity must be based.  As for the determination of significant maturity, the duration at which this point is reached will be set out in the Code, with the methodology and metrics used to calculate it set out in the Regulations and the Code.  Responding to concerns expressed over the interpretation of a “low dependency investment allocation”, the Regulations now clarify that schemes can invest a reasonable amount in a wider range of assets than, for example, government and corporate bonds, provided further employer contributions are not expected to be required.  Furthermore, the Regulations have been amended to clarify that the objective to invest in line with the low dependency investment allocation does not apply to surplus funding.

Some changes have also been made to what the Regulations require in the Statement, such as the level of detail and supplementary matters that schemes need to set out.  The intention here is to provide some flexibility for TPR to ask for less detailed information in some cases, which may ease implementation and avoid an “unnecessary administration burden”.  The Statement must be submitted to TPR as soon as reasonably practicable after it has been prepared or revised, with the submission process to be set out in the Code.  The Statement must be signed off by the appointed chair of trustees.

The revised Regulations have only just been issued and so deeper analysis and discussion among schemes and the pensions industry will no doubt take place over the coming days and weeks as we await the publication of the final Code.

TPR - New general code has been laid in Parliament yesterday

The new general code, expected to come into effect in March, has been laid in Parliament.

The structure of the new code facilitates comprehension for governing bodies, simplifying the process of meeting The Pensions Regulator’s (TPR) expectations.

The code prompts governing bodies to evaluate their schemes in alignment with TPR standards, placing a particular emphasis on fostering effective governance systems and conducting thorough risk assessments.

TPR advocates for proactive engagement, encouraging schemes to actively align with the prescribed standards.

Those that do not meet the code’s expectations should take immediate action to improve their scheme’s governance.

Should you require assistance in strengthening your governance, feel free to reach out to us. We can help you.

Click here to read the general code of practice.

The implications of the CMG case on rectifying errors in pension matters

In a recent decision (The Pensions Ombudsman v CMG Pension Trustees), the Court of Appeal has confirmed that obtaining a court order is necessary for the recoupment of overpaid pensions from members. The court clarified that relying solely on a determination by the Pensions Ombudsman is insufficient to recover a disputed sum.

Background

In 2022, the High Court, in the Pensions Ombudsman v CMG Pension Trustees, examined the trustees' authority to recoup overpaid benefits, focusing on reductions in future pension payments. Section 91 of the Pensions Act 1995 (PA95) governs set-off against pension benefits and allows trustees to recoup overpayments under specific conditions. These include (i) ensuring that deductions do not surpass the monetary obligation, (ii) providing the individual with a certificate outlining the owed amount and its impact on benefits, and (iii) in case of a dispute, waiting until the obligation is enforceable under a court order.

Summary

The court clarified that when recouping via future benefit reductions, a court declaration is sufficient, with no need for a payment order. The Court of Appeal later determined that the Pensions Ombudsman is not a competent court in this context. To enforce the Ombudsman's decision, trustees should deliver a certified copy to the County Court, which will then enforce it administratively, avoiding a rehearing of the case.

Additionally, the court addressed the interpretation of "competent court" rejecting the notion that the Pensions Ombudsman qualifies as a competent court. The court emphasised that the Pensions Ombudsman's role is distinct from a court, and his jurisdiction is one-sided, requiring a member to initiate the process.

Conclusion

Ultimately, the court dismissed the appeal, upholding the requirement for a court order from a competent court, such as the County Court and not the Pensions Ombudsman, to enforce recoupment after a dispute has been considered and determined by the Pensions Ombudsman.

TPO case - amber flag and overseas investments

The Pensions Ombudsman (TPO) recently issued its first ruling on the "amber flag" related to overseas investments within the pension transfer value regulations.

Facts:

Mr W sought a pension transfer in February 2022, triggering an amber flag due to perceived overseas investments. The Trustee required him to consult MoneyHelper. Mr W's adviser disagreed, causing a delay. His transfer was completed in May 2022, resulting in a reduced value.

Background:

The Transfer Regulations, effective from 30 November 2021, govern transfers initiated on or after that date. These regulations restrict the statutory right to transfer, imposing conditions that must be fulfilled, including evaluating the presence of red or amber flags.

Under this framework, a red flag stops the statutory transfer, while an amber flag temporarily suspends it until the member seeks specified guidance from MoneyHelper before trustees can proceed with the transfer.

Decision:

TPO ruled in favour of the Trustee, stating they acted reasonably. The decision emphasised the Trustee's right to interpret regulations and concluded that the delay was not unreasonable, considering the perceived overseas investments.

Our comment:

This case serves as a crucial support not only for pension trustees but also for administrators and providers grappling with the growing complexity of pension transfers. The intricacies involved, especially the need for additional scrutiny and consultations with MoneyHelper, have become more challenging since the Transfer Regulations came into force. TPO’s ruling provides valuable guidance, shedding light on the proper application of the "amber flag" in the context of overseas investments and giving clearer insights into how to navigate the regulatory landscape surrounding transfers and the associated requirements for member safeguards.

TPR - Regulatory intervention report

Today The Pensions Regulator (TPR) has released a report detailing regulatory and legal actions taken against Stuart James Garner, the former owner of Norton Motorcycles, who illegally invested pension schemes' money into his business.

Garner, 54, was sentenced to eight months in prison (suspended for two years) for breaching investment rules, leaving three pension schemes associated with Norton Motorcycles with a combined shortfall of £10 million and was banned from acting as a pension trustee again. He was also disqualified as a company director for three years and ordered to pay TPR’s costs.

TPR emphasised its commitment to supporting compensation efforts for scheme members through the Fraud Compensation Fund and highlighted its determination to prevent Garner from future trustee roles, making it a criminal offense if he acts as a trustee again.

Click here to read TPR report

Key priorities for TPR at the PLSA annual conference

Nausicaa Delfas, CEO of The Pensions Regulator (TPR) gave a speech on the key priorities for TPR.

She expressed gratitude for the opportunity to address the audience and emphasised the need for the regulator and the pensions industry to adapt to significant changes, particularly the shift from fragmented to consolidated pension schemes.

She outlined three main priorities:

1. protecting savers' money;

2. enhancing the system through effective market oversight and better practices; and

3. supporting innovation in savers' interests.

She stressed the importance of larger, well-governed schemes and highlighted the need for trustees to focus on value for money.

She also discussed the challenges faced by trustees and the importance of innovation, especially in retirement solutions.

The regulator plans to use its powers assertively, focus on data-driven strategies, and collaborate with various professionals to ensure good outcomes for savers in this evolving pensions landscape.

Click here to read the speech.

TPR's checklist for implementing pension dashboards effectively

Yesterday the Pensions Regulator (TPR) released an article highlighting the difficulties of tackling substantial projects and specifically addressing the preparation for implementing pensions dashboards.

Pensions dashboards represent an innovation in the pension system, aiming to enhance user experience and safeguard savers. Although there is a structured timetable for connection, adequate preparation is essential.

To simplify the overwhelming task, a preparation checklist has been introduced by TPR. This tool enables schemes to collaborate effectively, breaking down complex tasks into manageable steps.

The checklist emphasises the significance of accurate data, outlining key actions such as understanding the personal data from dashboards and planning improvements.

By utilising the checklist, schemes can ensure their data is precise and benefit from the positive outcomes beyond pension dashboards. The checklist assists schemes in visualising their goals and provides a structured approach toward achieving them. Trustees and managers have new legal responsibilities under dashboard regulations and the checklist aids them in fulfilling these duties.

Downloading and utilising the checklist is a step-by-step approach toward meeting connection deadlines and ensuring the success of pension dashboards implementation.

Download TPR checklist here.

Mansion House 2023

The Chancellor unveiled a set of innovative 'Mansion House reforms' aimed at unlocking capital within the financial services sector for the most thriving industries.

This initiative will not only boost returns for savers but also support economic growth across various sectors.

The government is introducing a range of actions aimed at enhancing the benefits for savers and improving the availability of funding for high-growth companies.

The government is:

• announcing an industry led compact committing many of the UK’s largest Defined Contribution (DC) pension providers to the objective of allocating at least 5% of their default funds to unlisted equities by 2030

• exploring demand for government to play a greater role in establishing investment vehicles, building on the skills and expertise of the British Business Bank

• publishing consultation responses on small pots and decumulation, applying additional requirements to DC schemes to support further consolidation

• publishing a consultation response setting out the intention to consult on draft regulations for whole-life multi-employer Collective Defined Contribution (CDC) schemes

• publishing a consultation response on a permanent superfunds regulatory regime for Defined Benefit (DB) schemes

• issuing a call for evidence on the role of the Pension Protection Fund and the part DB schemes play in productive finance

• launching a consultation on accelerating the consolidation of Local Government Pensions Scheme assets

Today the government has also published a joint consultation response with The Pensions Regulator and the FCA on a new Value for Money Framework for DC schemes.

https://lnkd.in/euDd4BcT
https://lnkd.in/eMJwyqfr

Time for action: make time to get your data dashboards-ready

Yesterday the Pensions Regulator (TPR) has published an article about the pensions dashboards to remind trustees and scheme managers to start working collaboratively to progress dashboards quickly and efficiently.

The Minister for Pensions laid amending regulations on 8 June to implement an approach to delivery of pensions dashboards. These regulations include a connection deadline of 31 October 2026, with anticipation that a staging timeline will be set out in guidance.

Trustees and scheme managers must:

1- understand the data that’s required to match savers to their pensions;
2- understand the data that will be sent for savers to view;
3- audit whether that data is in a dashboards-ready format;
4- verify that all data is accessible, accurate, and available digitally — a scanned document or PDF isn’t enough;
5- make sure that any gaps are filled as much as possible;
6- decide how to ‘match’ savers to their pensions;
7- consider that value data is a fundamental part of the user experience - Trustees and scheme managers will only have a limited time to provide this data — in many cases they will need to return it instantly and at most they will have three days to calculate a DC value and return it, or 10 days for a DB benefit; and
8- work with administrators to assess how much value data Trustees and scheme managers can frontload.

Here the link to TPR article https://lnkd.in/e-GpmBNZ

The ESG elephant is now in the room

Yesterday the Pensions Regulator (TPR) has published an article to explain why ignoring environmental, social and governance factors is no longer an option for trustees.

Louise Davey, Director of Regulatory Policy, Analysis and Advice at TPR explained that TPR will be carrying out a regulatory initiative (RI) in relation to statement of investment principles (SIP) and implementation statement (IS) which will have two phases.

- The first phase involves checking all trustees have published their SIPs and ISs (where they need to).
- The second phase involves a review of a cross-section of SIPs and ISs. This will be a qualitative review and only in relation to the climate, ESG and wider sustainability related provisions included in these documents.

When carrying out the review, TPR expects to focus on the extent to which the DWP guidance has been adopted by the trustees.

Where TPR believes schemes have not made a reasonable effort to define their policies in the SIP and report on how those policies have been implemented in the IS, TPR can take enforcement action.

Link to TPR article - https://lnkd.in/dqJPtB7w

Link to the DWP guidance https://lnkd.in/d75_3f4U

Annual Funding Statement 2023

The Pensions Regulator has just published the Annual Funding Statement 2023 which sets out what TPR expects from schemes depending on their liabilities, funding strength and covenant support.

This statement is for trustees and sponsoring employers of occupational defined benefit (DB) pension schemes. It is particularly relevant to schemes with valuation dates between 22 September 2022 and 21 September 2023 (known as Tranche 18, or T18).

Click below to read the Annual Funding Statement 2023.

https://lnkd.in/eX73nHgh

Guidance on pensions dashboards

Yesterday the Pensions Regulator (tPR) has published a new guidance based on draft regulations recently consulted on by the Department for Work and Pensions to help trustees meet their duties in relation to the pensions dashboards.

The guidance outlines the trustees' legal duties and includes a handy checklist, to help schemes manage their progress, which will be regularly updated.

TPR is now calling on trustees, scheme managers and administrators to attend a pensions dashboard webinar on 28 July at 2.30pm.

The guidance suggest Trustees should now:

- check their connection deadline. This is the date by which they will be legally required to be connected to the pensions dashboards
- have pensions dashboards firmly on their board agendas
- be deciding how they will connect: whether they will develop a solution in house, use a pensions administrator or integrated service provider
- be taking stock of and digitising their data. This is crucial so that savers are successfully matched to their pensions

Faster, Safer, Better DB Transfers. New PASA Good Practice Guidance.

PASA has published the DB Transfers: Good Practice Guidance.

The aim of this guidance is:
1- to improve the overall member experience through faster, safer transfers;
2- to improve communications and transparency in the processing of transfers; and
3- to improve efficiency for administrators.

This Guidance suggests simplified approaches for faster, safer and more efficient transfers which comply with regulations.

As you can read in the Guidance, the main principles are:

• The member experience is paramount. Administrators should endeavour to process each step as quickly and accurately as possible and be mindful of the impact of processing times on member perceptions, quality of outcomes and the administrator’s service reputation.

• Member communications should be timely, fair, clear, unbiased and straightforward. They should set clear expectations; signpost expected information requirements and provide supporting information where applicable.

• Members and, where appropriate, other third parties should be kept informed of delays in processing and the reason for the delay.

• When setting internal timescales for each stage of the process, administrators should be mindful of importance of safety and security. Technology should be used where appropriate to improve efficiency of processes and to enhance the member experience.

• Working practices should, as far as possible, follow the Guidance and administrators should use the Transfer Template when providing information to member advisers, recognising the vital role the administrator plays in supporting members in making informed decisions.

• Administrators should work with other third parties as necessary to meet the Objectives and Principles of the Guidance.

We are proud to be members of the PASA DB Transfers Working Group.

Annual Funding Statement 2022

The Pensions Regulator (tPR) published its Annual Funding Statement 2022.

This statement is for trustees and sponsoring employers of occupational defined benefit (DB) pension schemes and is particularly relevant to schemes with valuation dates between 22 September 2021 and 21 September 2022 (known as Tranche 17, or T17 valuations).

This statement aims to:

• set out specific guidance on how to approach valuations under current conditions; and

• highlight tPR's views on general risk management practices, regulatory developments and current issues facing schemes, which are expected to have a bearing on pension scheme management.
  

In this statement tPR set out guidance to enable schemes to focus on certain aspects such as:

• Considering how market uncertainties impact the employer’s covenant and the tPR expectations of scheme trustees.

• Considering the impact on scheme assets and liabilities from the current high and rising inflation rate, as well as greater volatility in the investment markets.

• Setting out tPR views on reasonable long-term mortality assumptions in the absence of sufficient evidence or a robust assessment of the long-term effects of COVID-19.

• Highlighting, in the accompanying tables, the key risks tPR expects trustees and employers to focus on, and actions to take, depending on the scheme’s funding strength, maturity, and strength of the employer covenant.

Scheme Returns - deadline fast approaching and additional information required

Don't forget to complete and submit your scheme return by 31 March 2022.

Here is an article from the Regulator about the additional information and resources to help trustees prepare for and complete a scheme return for defined benefit (DB) schemes and those offering mixed benefits (hybrid).

The new questions for DB-only and hybrid schemes are (where relevant):

1- the website addresses where the scheme’s statement of investment principles (SIP) and implementation statement have been published;
2- the website address where the scheme's climate change report has been published;
3- the trustee assessment of the employer covenant grading (if available);
4- information about the more detailed value for members (VFM) assessment; and
5- the website address where extracts from the chair’s statement have been published

To find out more, read the article from the Regulator and don't forget the deadline to submit your scheme return is fast approaching.

New PASA Data Matching Convention (DMC) Guidance

From 2023 Pension schemes and providers must comply with new legislative duties for the pensions dashboard.

They are required to make their members’/customers’ pension data available.

The aim of the pensions dashboard is to enable individuals to find their pensions, through schemes and providers making as many definitively positive matches as they can.

Therefore, schemes and providers need to soon decide how they want to digitally compare and match ‘find requests’ from users of dashboards against all the records they hold.

This new Guidance from PASA will help schemes make initial progress with their dashboards preparations by deciding how to match and improve data accuracy.

This Guidance also contains useful practical case study examples.

Good “Value for Members” or wind-up

The Occupational Pension Scheme (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 (the 2021 Regulations) has introduced the following two new requirements for trustees and managers of relevant occupational pension schemes:

1- to calculate and state the return on investments from their default and self-selected funds, net of transaction costs and charges; and

2- to demonstrate that their schemes deliver value for members (VFM).

Both the statutory guidance (the Statutory Guidance) and the Pensions Regulator’s value for money guidance (the TPR VFM Guidance) offer a support to trustees and managers of relevant occupational pensions schemes dealing with these new requirements.

Reporting net investment returns

The 2021 Regulations require that, from 1 October 2021, trustees of all relevant pension schemes[1], no matter what their asset size is, are required to calculate and state the return on investments from their default and self-selected funds, net of transaction costs and charges.

The trustees must record this information in their annual chair’s statement and publish it on a publicly accessible website.

The aim of this requirement is to help members understand how their investments are performing.

The Statutory Guidance suggests how information could be displayed for different member age groups and different charging structures and includes useful examples.  

VFM assessment

For each scheme year ending after 31 December 2021, trustees of relevant schemes with a total asset under £100 million (known as specified schemes), which have been operating for 3 or more years, must demonstrate that their schemes deliver VFM.

If they are unable to demonstrate this, they need to consider winding up their scheme and transferring their members to a different scheme that provides good value for members.

To demonstrate that their schemes deliver VFM, trustees of relevant schemes have to carry out an assessment which must involve a comparison against three other schemes.

We have set out below a road map to help the trustees of a specified scheme navigating through this new requirement.

[1] A ‘relevant scheme’ is defined by Regulation 1(2) of the Occupational Pension Schemes (Scheme Administration) Regulations 1996. This definition includes most schemes that provide money purchase benefits while excluding defined benefit schemes.

The three broad factors

When trustees of specified schemes complete the VFM assessment, they need to consider the:

•          costs and charges assessed relatively, based on comparison with at least three other pension schemes;

•          net investment returns assessed relatively, based on comparison with at least three other pension schemes; and

•          administration and Governance assessed on an absolute basis within the pension scheme itself.

In accordance with the Statutory Guidance, for the purposes of assessing costs and charges and net investment returns, each specified scheme must compare itself with three “comparison schemes” which should be:

1-      an occupational pension scheme which on the relevant date[2] has total assets of £100m or more; or

2-      a personal pension scheme which is not investment regulated under the Finance Act 2004.

The 2021 Regulations also requires that trustees of specified schemes have had discussions with at least one of the comparator schemes about a potential transfer of the members’ rights if the specified scheme is wound up.

TPR publishes an updated list of authorised master trust schemes that trustees of specified schemes may want to consider when choosing comparison schemes. However, trustees are free to select their own comparison schemes.

Differently from the costs and charges and the net investment returns, the administration and governance assessment does not require a comparison.

However, for the VFM assessment, the Administration Regulations (as amended by the 2021 Regulations) lists the following 7 different key metrics that must be considered and assessed:

1.       Promptness and accuracy of core financial transactions: trustee should have effective methods to control the risk of delays and inaccuracies in processing financial transactions and reconcile and rectify errors.

2.       Quality of the records kept by the trustees or managers: trustee should have reliable, accurate, secure data and processes in place to review records in order to deliver value for scheme members.

3.       Appropriateness of the default investment strategy: including the quality of decision making and governance in relation to the strategy.

4.       Quality of investment governance: trustees have responsibility for securing the proper management of the scheme’s assets and good scheme investment governance.

5.       Level of trustee knowledge and understanding and skills to operate the scheme effectively: to demonstrate compliance with the new requirement, trustees should include reference to (i) whether sufficient time is spent running the scheme, (ii) diversity of the trustee board, (iii) quality of leadership and effectiveness of board decision making (iv) trustee continuous learning and development and (v) quality of working relationship with employer and third parties.

6.       Quality of communication with the members: trustees have to demonstrate their compliance with statutory obligations and explain the quality and timeliness of information in various areas.

7.       Effectiveness of the management of any conflicts of interest: pensions scheme should have a conflict of interests policy and controls in place to ensure conflicts are correctly declared.

The Statutory Guidance is clear that, trustees of schemes that do not provide good VFM, need to look to wind up their schemes and transfer the rights of their members into a larger occupational pension scheme or personal pension scheme or set out an immediate action to make improvements to their schemes.

[2]A relevant date is the date on which the trustees obtained audited accounts for the scheme year that ended most recently.

How HPW can help you

The government’s expectation is that members should rely on a well-run scheme that delivers optimal VFM over the long term.

If this is not achievable, members should be expected to be transferred to a different scheme which can offer this optimal VFM.

HPW can help you in different ways.

• Understanding the new requirements in this area

We can explain to you the background and the legislative requirements. We can make sure you understand your duties and comply with them.

• Net investment returns & VFM assessment

We can guide you through all the requirements to complete your net investment returns and your VFM assessment and we can make sure this is done in the most efficient way.

• Improvement or consolidation

If, after completing your VFM assessment, you believe that you are not able to offer VFM, we can help you set out an immediate action to make improvements to your scheme or, alternatively, winding up your scheme and transfer the rights of your members into a larger occupational pension scheme or personal pension scheme that can offer good VFM.

Please get in touch with us if you wish to discuss this further with us.

TPR – the new single code of practice

Easy to use, accessible and clearer: the new single online code is the place where everyone can find all the information currently contained in 10 codes of practice for the Regulator.

The new code has the potential to bring together codes, guidance and the Trustee Toolkit.

The table below shows which codes of practice are being replaced by the new code.

Expectations, requirements or statements of the law?

It’s important to bear in mind that the codes of practice set out TPR’s expectations for the conduct and practice of those who must meet the requirements set in pensions legislation but they are not statements of the law, except in certain circumstances set out in legislation.

However, even though in most cases there is not a specific penalty for failing to follow a code of practice, TPR may rely on codes of practice in legal proceedings as evidence that a requirement has not been met and the court must take a code of practice into account when considering their verdict.

Governing bodies

The new code is addressed to various pension professionals and, to provide consistency, a new term has been used: governing bodies. This new term groups trustees or managers of occupational pension schemes, managers of personal pension schemes, and scheme managers and pension boards of public service schemes.

However, as some expectations are applicable only to specific audiences (for example the trustees) and not the generic “governing bodies”, the code also uses the specific term when relevant.

We have listed below the different areas introduced or receiving greater detail in the new code.

1-Internal control – Own risk assessment (ORA)

There is no secret, a well-run scheme is a scheme with robust internal controls.

Policies, processes and procedures (that together form the internal control of a scheme) that work correctly and are regularly checked and adjusted to the changing needs are a guarantee for a smooth running of a scheme.

If yours is a private sector scheme with 100 or more members, you, as a governing body, have the new requirement to carry out and document an ORA.

What is an ORA?

The ORA will identify the key governance risks facing your scheme and the governing body need to use the findings:

·In the management of your scheme and the decision-making processes;

·to adjust existing processes and procedures or create new ones; and

·to identify the areas of work that you need to undertake.

Areas covered by the ORA

The Regulator requires that the governing body carries out an ORA that is proportionate to the size, nature and complexity of its scheme.

The areas that should be covered when carrying out an ORA are set out below.

Documentation

The governing body should:

• ensure the ORA is in writing

• provide the ORA documentation to all members of the governing body

• ensure the ORA documentation is available on request

• make sure the chair of the governing body signs off the ORA

The governing body should record:

• the date on which the ORA has been prepared

• the date on which the next ORA will be prepared

• details of any interim reviews or updates that the governing body has carried out or plans to carry out

The ORA documentation should cover:

• how the governing body has assessed the effectiveness of each of the policies and procedures covered by the ORA

• whether the governing body considers the operation of the policies and procedures to be effective and why

The Regulator states that, to meet their expectations, the ORA should consider the effectiveness of, and risks arising from, each element listed below.

Policies for the governing body

How the governing body is integrating risk assessment and mitigation into the management and decision-making processes.

The operation of policies relating to the:

• role of the governing body;

• building and maintaining knowledge; and

• governance of knowledge and understanding

Risk management policies

• The operation of policies to identify and assess risks facing the scheme.

• Continuity planning for the scheme and, where applicable, how it has performed.

• The internal control policies and procedures for the scheme.

• Management of potential internal conflicts of interest, and those with participating employers and service providers.

• The prevention of conflicts of interest where the employer and governing body use the same service provider.

Investment

• The scheme’s investment governance processes.

• How investment performance is reviewed and monitored.

• How the governing body assesses investment risks relating to climate change, the use of resources and the environment.

• How the governing body assesses social risks to the scheme’s investments.

• How the governing body considers the potential for depreciation of assets arising from regulatory or societal change.

• How the governing body assesses the protection mechanisms available to the scheme, including how these might apply and the risks of them not functioning as intended.

• How the governing body ensures the security of assets and their liquidity when they are required.

• How the governing body assesses the protection of member benefits in the event of the insolvency of a sponsoring or participating employer, or a decision to discontinue the scheme.

Additional investment matters for DB schemes

• How the governing body assesses the scheme's funding needs with reference to its recovery plan.

• How the governing body assesses the specific risks relating to the indexation of benefits provided by the scheme.

Administration

• How the governing body assesses the risks associated with the scheme’s administration with particular reference to financial transactions, scheme records and receiving contributions.

• Action the governing body takes to manage overdue contributions considering the degree to which they represent material amounts or delays.

Payment of benefits, where applicable

• How the governing body assesses operational risks, focusing on the risk to members and beneficiaries relating to record-keeping and payment of benefits.

• The governing body’s management of risks relating to circumstances where accrued pension benefits may be reduced, under which conditions and by whom.

• The governing body’s management of the risk of member benefits being reduced or altered, including on the insolvency of a sponsoring or participating employer or the cessation of the scheme.

We have also set out below a chart which we hope will help you to navigate this new requirement.

2- Cyber security

Cyber security is a topic already addressed by the Regulator but the single code now places direct expectations on security and maintenance of scheme data.

The expectations will apply only to certain schemes (yet to be determined), but the Regulator strongly encourages all schemes to adopt as many of the expectations as possible.

3- Environmental, social and governance (ESG)

As concern about climate change and social responsibility grow, the new code introduces the following two modules that address matters in these areas:

1- Stewardship focuses on the governance responsibilities that come with financial investments; and

2- climate change and the risks and opportunities it presents.

4- Financial transactions

The new code also introduces a new module on financial transactions which contains expectations that apply to DB, DC, or hybrid schemes.

The new code is not in force yet but, if you want to have a look at the early version, please click here.

Single code of practice – all the information in one click

The transformation should happen around summer 2022 when the existing 15 codes of practice from the Regulator will be transformed into only one new online code which provides all the information on scheme governance and management.

The hope is to create a clearer and more accessible single code of practice.

The full draft of the new code of practice is available here.

The Regulator held a consultation from March to May 2021 and the responses provided challenges and ideas with an extensive range of views from different areas of the pensions industry.

The majority of the requirements introduced by the code apply to schemes with 100 or more members. However, it is essential that also schemes with fewer than 100 members have an effective system of governance in place which is proportionate to their size, nature, scale and complexity of activities.

The key issues raised by the consultation are:

• Common expectations

• Intended audience for modules

• Use of the ‘governing body’

• Unregulated investments

• Own risk assessment

David Fairs, TPR’s Executive Director of Regulatory Policy, Analysis and Advice, said: “I’m confident the feedback received during our new code consultation will help ensure the final version provides a clear, up-to-date and consistent source of information on scheme governance.”

If you want to see an early version of the web-based code click here

TPR climate adaptation report

At the end of October 2021, the Pensions Regulator (the Regulator) published a report about climate adaptation.

The report shows (i) the risks from climate change relevant to occupational pension schemes and (ii) how the Regulator addresses them.

From the report it appears that pension schemes do not give enough consideration to climate change risks which is negatively reflected in their investment performance.

What are the climate-related risks for occupational pension schemes?

There are three different types of risks that can occur because of climate change and these are:

1. Physical risks: which are the risks connected with the average temperature going up (for example flooding or fires that threaten physical assets and disrupt supply chains);

2. Transitional risks: these risks may arise because of the change towards a low-carbon economy; and

3. Litigation risks: these are potential risks that pension schemes may face if they fail to adapt to physical and transitional risks.

What are the Trustees’ requirements in relation to climate-change?

Some trustees of occupational pension schemes have to:

• prepare a Statement of Investment Principles (SIP) which:

1. should include a policy on environmental considerations including climate change, which they consider financially material;

2. must include trustees’ stewardship policy of the rights attaching to the investment and trustees’ policy on how non-financial considerations are considered when investment decisions are made; and

3. should explain the trustees’ policy on engaging with asset managers.

• produce the Implementation Statement where they have to describe how they have put SIP policies into practice if their scheme provides money purchase benefits; and

• under the Pension Schemes Act 2021, which adapts the recommendations for trustees from the Taskforce for Climate-related Financial Disclosures (TCFD), (i) have an oversight of climate-related risks and opportunities (ii)  work out the scheme’s carbon footprint by calculating the greenhouse gas emissions of the investment portfolio and (iii) set a climate-related target and publish a report on their work.

The Regulator’s approach

The report clearly shows that there are too many climate change related risks and that not enough trustees of both Defined Contributions (DC) and Defined Benefits (DB) schemes are paying enough attention to these risks.

The way the Regulator is planning to address this problem is to engage with the pension schemes. The Regulator’s plan is:

• to set clear expectations so the standards required are clear and easily adopted;

• identify climate change risks early by, for example, carrying out a thematic review on scheme resilience to climate-related scenarios or recommending trustees sign up to the 2020 UK Stewardship Code;

• to improve compliance through supervision and enforcement; and

• to work with their regulatory partners and stakeholders to guarantee a more comprehensive and consistent approach.