What’s new in the General Code?
The General Code (previously known as the Single Code during the consultation phase) has now been laid before Parliament and is expected to come into force on the 27 March 2024. A lot of the code’s 171 pages are not new. The code brings together existing guidance and good practice to make it easier for trustees to comply with them. This article will cover the elements that are new, as well as the elements that aren’t but may require a new approach.
- Codifying an ‘effective system of governance’ (“ESOG”) in a way which complies with the code will be new for a lot of schemes
- A requirement to establish a remuneration and fee policy as part of the ESOG
- A requirement to complete an ‘own risk assessment’ (“ORA”) to effectively assess how well the ESOG is working
The Pensions Regulator (“TPR”) consulted on what it then called the ‘Single Code’ in March 2021, having announced the idea in 2019. The aim was to draw together 10 codes of practice that TPR has published into one single code to get better, more efficient levels of compliance from pension scheme trustees. Following that process, the rebranded ‘General Code’ was updated to reflect statutory changes up to October 2022 and to take into account the more than 100 consultation responses received. It was then laid before Parliament on the 10 January 2024.
The General Code, much like its 10 predecessor codes, will not be legally binding on trustees. However, there is overlap between the code and underlying statutory requirements, and compliance with the code can and will be considered by the courts when assessing whether statutory requirements have been met. For those reasons and as good practice, trustees of all occupational pension schemes (including both defined benefit and defined contribution) will want to comply with the requirements, some of which are new with the code.
ESOG is a system by which trustees of an occupational scheme of more than a 100 members run the scheme. It comprises sets of trustee policies, processes and internal controls. The key elements that an ESOG must cover are:
- Investment – this section of the ESOG must detail the trustee’s approaches to investment governance, monitoring and decision making, climate change and stewardship;
- Communications – this section must cover the approach to sending member communications;
- Management of activities – this section must state the trustee’s role, record the ways the trustee meets and makes decisions, the way the trustee handles dispute resolution, the trustee’s approach to improving knowledge and understanding and the trustee’s remuneration and fee policy (which is an entirely new requirement); and
- Organisational structure – this section must cover conflict of interest procedures, how the trustee manages its advisers and the role of the chair.
The ESOG has been a legal requirement since 2019 and TPR has stressed that it expects that well run schemes will already have an ESOG that will comply with most of the code already. However, what is new is TPR’s focus on seeing schemes demonstrate a compliant ESOG and having trustees open a dialogue with TPR regarding their ESOG.
The code brings together existing guidance and TPR hopes that trustees will ‘rebadge’ existing policies and processes wherever possible to form an ESOG which functions as a centralised suite of key documents. This will mean that trustees, while not changing too much about the way they run the scheme, may have to change the way they approach demonstrating their running of the scheme to TPR. The code will require processes to be brought together and many trustees may find gaps that need plugging and policies that need updating as part of this compliance exercise.
TPR has stressed that having an ESOG will be a requirement of all occupational schemes, but that the efforts on this should be proportionate. It has not clarified exactly what it means by proportionate, but many in the industry understand this to mean that smaller and/or less complex in nature schemes do not need to demonstrate as comprehensive an ESOG as larger and/or more complex schemes.
The code has introduced a new requirement to have a remuneration and fee policy as part of the ESOG. This does not need to be published as proposed in the original draft single code and does not need to disclose the level of remuneration, but does need to state any remuneration which the trustee is directly responsible for.
The code introduces an entirely new requirement for schemes with more than 100 members to produce an ORA. While the legal requirement to produce an ORA only effects those schemes, TPR has said that it will consider it good practice for all schemes to have an ORA. An ORA is a document which reviews how the ESOG is performing. As it will be a document that essentially reports on risk management, it is expected that the ORA will be tailored to the scheme and its risks. The tailored nature of an ORA is the reason that TPR has given for not providing a template. However, most in the market expect various trustee advisers to form templates to efficiently demonstrate compliance with this requirement.
The ORA was initially going to become a requirement within 12 months of the code coming into force and TPR was initially keen for it to be reviewed and updated every 12 months after that. However, it has now decided that trustees will be required to produce an ORA within 15 months of the date the trustee is required to obtain the next actuarial valuation, within 12 months of the end of the scheme year after the code is in force, or by the deadline for the scheme’s next chair’s annual governance statement, whichever is later. The requirement to review an ORA has also been softened to every 3 years, which matches TPR’s requirements to review various scheme policies. It is also not necessary for all elements of the ORA to be assessed at the same time so trustees can review elements of the ORA in stages which will likely make the task more manageable.
TPR is keen for trustees to use existing risk reviews as part of the ORA meaning that it will, again, hopefully be a codification of existing processes for well-run schemes with additional steps taken to fully comply with the code.
While trustees of master trusts are within the scope of the General Code, they are not subject to the legal obligation to have an ESOG. Master trust trustees will also continue to be subject to the code of practice on the authorisation and supervision of master trusts and the different legal requirements for master trusts. The result is that compliance with the General Code may not be straightforward and an element of judgment will be needed.
Schemes have a longer window to ensure compliance with the code than initially anticipated, but it will mean some work, even for those schemes with robust existing processes and policies. Trustees will be best served beginning the compliance journey early. The first step will be to do an inventory of existing policies and processes before deciding what needs to be updated and what needs to be produced to meet the new requirements.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.