The second European Pensions Directive (‘IORP II’) came into force in January 2017, with the aim of improving governance and accountability in relation to ‘IORPs’ (broadly, occupational pension schemes).
Under this Directive, occupational pension schemes were (amongst other things) required to put in place an ‘effective system of governance’ and to carry out an ‘own-risk assessment’ at least every three years and ‘without delay’ following a significant change in their risk profile.
The UK incorporated these IORP II requirements into national legislation with the passing of the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 (‘the Governance Regulations’). These regulations require occupational pension schemes to establish and maintain an effective system of governance that is:
However, the Governance Regulations do not prescribe how schemes should establish or carry out these processes, or how the UK Pensions Regulator (‘TPR’) should regulate them, requiring this detail to follow in TPR’s codes of practice.
TPR currently has several codes of practice which give practical guidelines on how to comply with the legal requirements of UK pensions regulation, and which are taken into consideration by the courts and TPR when assessing if these requirements are met. TPR chose to set out the detail of the new governance processes in its new single code of practice, which aims to combine TPR’s existing codes into ‘a clearer, more accessible’ whole.
In March 2021, TPR published a consultation on this draft single code, calling for industry views. The consultation forms the first phase of TPR’s work, initially bringing together ten of its 15 current codes in 51 new ‘modules’ (and in doing so, reducing its page count for these by nearly half).
Current governance expectations have been updated in this draft code to reflect the Governance Regulations. For both the effective system of governance and the ORA, TPR has created modules that are intended to act as an index for the elements that should be considered.
TPR notes that the ORA is distinct from the normal risk management processes for a scheme, and will be a way for governing bodies to demonstrate that they have fully considered the various risk management processes – external, financial and operational – that their scheme faces, and how well their policies and procedures address these.
Schemes are not required to publish their ORA or to send it to TPR, but TPR expects schemes to record it, and warns that the first ORA ‘may be a significant piece of work’. As the current draft stands, this first ORA must be prepared and documented within one year of the single code coming into force, with subsequent assessments to be carried out annually, or whenever there is a material change in the risks facing the scheme or to its governance processes.
TPR is considering the industry’s feedback to its consultation and recently published an interim response announcing that the new single code is unlikely to come into force before summer 2022.