Three 'Current' Key Questions For an Effective System of Governance (ESoG)

The Pension Regulator’s (TPR) Single / General code is now expected to be published ‘this Spring’, which should assist trustees in operating an ESoG and being able to evidence it.

Currently, the three main questions I am being asked in respect of the ESoG are:

1. What is required and is it really necessary?

In short, the requirement is to operate an effective system of governance and evidence it or, to put it another way, ‘good governance should be done and be seen to be done’. We know the law changed in Jan 2019, by way of an amendment to the Pensions Act 2004. From that point, trustees have been required to operate an ESoG, including Internal Controls. However, some elements of the 2019 law change have been reliant upon TPR updating its code of practice – initially expected to be an update to Code of Practice 9 and now the Single / General Code.

As a reminder, Internal controls are: Administration and Maintenance of the Scheme, with the security of the Scheme’s Assets. In the draft code TPR states: “A system of governance will include anything that can reasonably be considered part of the operation of a pension scheme”. The ‘gap’ therefore is the difference between the Internal Controls, which we have had since 2006, and ‘Anything that can reasonably be considered part of the operation of a pension scheme’. This is potentially quite a wide gap for many trustee boards and most importantly, this is only something trustees can do.

2. Trustees can wait for the Regulator to issue the General / Single Code can’t they and it’s then just a tick box exercise, isn’t it?

Importantly in its draft Single / General Code, TPR sets out its expectations on the conduct & practice of trustee boards. Conduct and practice are verbs. The focus of the metrics should therefore be around Trustees behaviours. Hence, this is only something Trustees can do and Trustee behaviours can be a little difficult to apply a ‘tick box’ exercise to.

Trustees should have a written governance framework, supported by written documents, policies, procedures, statements, logs, registers, lists etc. However these are only words on paper. The key is what the Trustees do with these words.

One potential conduct and practice may have been where trustees have waited for TPR to issue the Single / General Code before setting out how they will evidence the ESoG and prepare their Own Risk Assessment (ORA). As noted above, the ESoG became law in Jan 2019, now over four years ago. Some Trustees may therefore need to take care if their stated behaviours include adhering to the law at all times.

3. How will the Regulator know Trustees have actually done it and what happens if they don’t do it?

Regulatory reporting is one aspect of the ESoG and ORA, which, in a recent webinar, a TPR representative stated that there is no current requirement to publish anything, although others may be interested and TPR can review on request. However, it would be relatively easy for TPR to ask for the ORA to be appended to the scheme return in future.

Another key aspect is the potential commercial perspective. For example, any employer selling or acquiring a company with a defined benefit (DB) scheme or employers with or issuing corporate debt and refinancing strategies, until now have had the benefit of the numbers around the pension scheme’s funding levels through company accounting disclosures. However, the ORA should illustrate how well the scheme is governed and will highlight risks, which may have an effect on these financial considerations. There is the obvious conflict of interest here for trustees employed by the sponsor, which will need to be carefully managed as lenders and potential acquirers will be aware of this conflict.