General Code of Practice: effective system of governance, own risk assessment and sole trustees

Following the recent announcement from the Pensions Regulator (TPR) to formally introduce market oversight of professional trustees and one year after the General Code of Practice (the General Code) came into force, we look at whether professional trustees are using it to raise the bar on governance.

Professional trustees approach to governance

Governance can be broadly defined as the overall system by which entities are managed, controlled or overseen. The General Code requires pension scheme trustees to have an Effective System of Governance (ESOG) in place. Effective governance should be considered crucial to achieving an organisation’s goals and objectives by creating more effective decision-making and implementation.

One of the key drivers of demand for introducing a professional corporate sole trustee (this is where the firm acts solely as corporate trustee to a pension scheme) is the need for more efficient decision-making, improved governance and professionalisation of trustee boards. Sole trustees need to ensure they can be held to the highest account in adhering to the General Code requirement as employers and members expect sole trustees to maintain a high bar when it comes to scheme governance. 

Through our regular engagement with professional trustees, we’ve understood that some firms have introduced centralised governance policies and processes for their professional corporate sole trustee (sole trustee) clients. Centralisation supports individual trustees in establishing effective governance for their schemes. This also helps to assist compliance with the Association of Professional Pension Trustees’ (APPT) Code of Practice and to create efficiencies in updating the governance framework for new regulations. With TPR’s incoming engagement to understand governance standards for members and all stakeholders this may also prove useful in that regard. The introduction of the General Code has been a prompt for change, and we surveyed nine firms to understand its impact.

Has the General Code raised the governance bar?

Seven out of the nine professional trustee firms we surveyed said the General Code has “to some extent” helped raise the bar on governance for sole trustee schemes. One firm suggested it hasn’t had much impact; another noted they’ve used it as an opportunity to “refresh our approach and introduce new processes and ways of governing our schemes”.

In general, these firms said the General Code was neither easier nor more challenging for sole trustee appointments than implementing it for trustee board appointments. That said, under a sole trustee arrangement the responses reflected that it’s been easy to apply solutions at the portfolio level, with many firms taking a uniform approach to ESOGs and some using technology platforms to facilitate their governance processes and drive consistent practices. Like many schemes, sole trustees acknowledge that the General Code formalises processes that have been in place for some time.

One firm noted that having one ESOG for all sole trustee schemes has made it easy for individual sole trustee client teams to adopt, but that the ESOG needs to be considered by those teams in the context of scheme-specific documents – eg the conflicts policy, risk register and incident response plan. For governance to support the achievement of pension scheme goals and objectives, this is a critical step for individual schemes’ ESOG. Many professional trustee firms have chosen to apply this consistent ESOG approach to their portfolios so they can “implement updates and changes to standard policy wording across our portfolio swiftly and comprehensively”.

Has the General Code presented any challenges?

A challenge raised by a few firms was for schemes where buy-out and wind-up are on the horizon, where there’s been a need to balance compliance with being proportionate. In our own experience of these cases, a minimal approach to new policies has generally been adopted. The Own Risk Assessment (ORA) has been adapted to reflect that schemes near wind-up often have, for example, much simpler investment arrangements (their main investments being the insurance contract they hold). However, schemes near wind-up need to retain robust governance structures, and conflicts may arise in discussions with the sponsor over issues such as surplus sharing and residual risk cover. One firm suggested this challenge is slightly easier for sole trustees, as they can take a consistent approach to these schemes.

How are sole trustees responding to new requirements in the General Code?

The risk-management function

Sole trustees’ risk-management functions (RMF) present the biggest disparity in terms of approaches. While it’s not a new requirement that pension schemes should monitor and manage risks, the RMF terminology is new, as is, in our view, the clarity that, in the interests of separating daily monitoring and oversight, this should ideally not be done by the full trustee board. Options for the RMF include being a subset of the governing body or a separate function – in either case, each report to the full governing body.

There were broadly three ways that sole trustees looked to manage this:

1. The RMF mirrors the make-up of the governing body, and the role of risk management is wholly managed by the governing body.
2. The RMF mirrors the make-up of the governing body, but central collateral and training are available to assist the governing body.
3. The RMF is an internal governance body of the overall professional trustee firm.

Several responses highlighted the need to separate the RMF from the oversight function, but scheme size and complexity might necessitate a more proportionate approach. Generally, the above approaches adopted by individual schemes were not prescribed at a firm level. Some firms noted it may also depend on the existence of in-house or outsourced pension-management functions.

Sole trustees are developing innovative and pragmatic solutions to the implementation of the RMF; this is understandable, given under a sole trustee arrangement, for some schemes there may be less scope for subcommittees. The General Code was written for governing bodies in general and therefore, there is likely to be a range of approaches taken by schemes in establishing their RMF arrangements.

If you have any questions, or would like to discuss anything further, please contact your usual Hymans Robertson consultant or get in touch here.

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.