Think UK pensions will no longer be affected by EU law? Think again. Unnoticed amid the rumblings of Brexit and coronavirus is the fact that schemes still need to comply with the UK’s 2018 governance amendment regulations, which transposed the EU’s second directive for Institutions for Occupational Retirement Provision into UK law. 

 

The UK was obliged to put IORP II into national legislation by 13 January 2019, which it did with the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018; according to these regulations, the trustees or managers of a scheme "must establish and operate an effective system of governance including internal controls”, which “must be proportionate to the size, nature, scale and complexity of the activities of the occupational pension scheme”. 

 

 

The government did not require schemes to implement the changes overnight; instead, there was an expectation that the Pensions Regulator’s codes of practice would form part of the implementation of IORP II. With the regulator due to consult on merging its 15 codes into one, guidance on the new governance regulations is now thought to be included in this. 

 

A spokesperson for the Pensions Regulator said: “We temporarily suspended this project last year due to the Covid crisis. However, we have resumed working on it and a consultation will be published soon.” 
 

 

Among others, the rules will require trustees of schemes with more than 100 members to carry out risk assessments and document these at least every three years. They will need to have risk management in place and show how it feeds into decision making, explained Sara Cook, a principal at consultancy Barnett Waddingham and vice-chair of the Pensions Management Institute, speaking at a PMI webinar on Monday.  

 

Trustees will also have to prevent, rather than just manage, employer conflicts of interest, she said – for example, where key functions are performed by the same person – and assess board effectiveness. The latter would ideally need third-party involvement, but smaller schemes could find this too costly. 

 

Cook expects there to be emphasis on diversity and inclusion in the governance proposals, saying that “TPR has been keen to highlight the positive impact of diversity and inclusion”, being of the view that a balance in skills and experience lends itself to better decision making. The diversity requirements should extend to advisers, she added. 

 

There will be some boards which may not need to change, she observed, but cautioned that trustees should ask if decisions are “really optimal or simply convenient”. She said that “ensuring a scheme has optimal diversity and inclusion is not an overnight solution, so the sooner schemes start to think about it, the better.” 

 

The new requirements on risk management could demand significant improvements from schemes. Those surveyed by Barnett Waddingham “seemed to take a fairly simple approach” so far, noted Cook – with fewer than two-thirds monitoring and reporting on risks, just 35% using key risk indicators, and only 15% performing deep dives into specific risks. This is particularly concerning as, in her view, “the new regulations mean key risk indicators are much more likely to be used going forward”. 

 

   

She expects schemes will be given at least one year to start documenting their risk management from when the regulator’s code is finalised but noted that the triennial process adds further to an already heavy governance burden. Therefore, “the way forward may be the establishment of a governance committee”, she said. 

 

 

James Walsh, head of membership engagement at the Pensions and Lifetime Savings Association, said the PLSA also understands that the governance regulations will be incorporated into a TPR consultation on the single code of practice.  

 

However, he does not think that schemes will need to undertake significant efforts to comply. “In many cases, trustees of schemes with more than 100 members will be affected very little. IORP II doesn’t require schemes to do much that they don’t do already,” he said.  

 

“Perhaps the key exception is that schemes will be required to send annual statements to deferred DB members, but the government has always said this would be achieved by introducing the dashboard,” he noted. 

 

Walsh believes the rules implementing IORP II will go ahead despite Brexit because “the government made it clear all along that the UK would implement EU directives passed while we were an EU member, and the policy remains to wrap the IORP II changes into the single code exercise”. 

Stuart O’Brien, a partner at law firm Sackers, also does not think the regulations can fall away unless further regulations were made to reverse the position. 

 

In practice, he thinks TPR is likely to focus on climate change in future consultations, and could for example update its guidance on Integrated Risk Management to flag climate-related risks, making clear that these should be considered regardless of whether a scheme has assets over £1bn and is caught by the new Task Force on Climate-related Financial Disclosures regulations. 

 

The combined code of practice could also include modules on climate change and on stewardship, and he expects TPR to update the content on climate change in the Trustee Toolkit. 

  

“As to when we might get these though I couldn’t say. Possibly they would do the first one before the combined Code as it is a bit more standalone and therefore might be easier for them to produce,” he said. 

 

He pointed out that the regulator has to produce a report on climate change adaptation in the occupational pensions sector under Defra’s climate reporting regime by December 2021, and has received an open letter from the Department for Work and Pensions on similar issues last year. 

  

"I would expect they will want to have something to show by way of updated guidance by then,” he said.