These requirements stated that, going forward, schemes must establish and operate an effective system of governance (ESOG).
An effective system of governance being a framework that enables a scheme to operate ethically, transparently, and in alignment with its strategic objectives. In practice, this involves a set of policies, processes, and structures that aides behaviour and decision-making. Effective governance ensures accountability, fosters ethical decision-making, and mitigates risks.
If you imagine the General Code as a rulebook for your pension scheme. The ESOG is the housekeeping, ensuring everything is organised, risks are identified and managed, and decisions are made responsibly. The Own Risk Assessment (ORA) is a self-check to evaluate that your housekeeping is up to par.
At first glance it feels complicated, and it is, largely as its quite a lot to formalise, but there are things schemes can do to keep it as manageable as possible:
- Keep it simple: Don’t let jargon or complex frameworks cloud the basic requirements of the General Code.
- Tailor your approach: It won’t be a one-size-fits-all solution. Adapt your approach to the ESOG and ORA based on your scheme’s size, complexity and long-term journey.
- Document what you’ve got: Many schemes already have solid governance systems in place. The key is documenting them to meet the Code’s requirements.
Back to basics
Think of it like this.
The ESOG is a monitoring framework;
- Proportionality and Pragmatism: Tailor your ESOG to the size and complexity of your scheme. A small, simple scheme might require less formal documentation than a large, complex one.
- Documentation: Ensure your ESOG is well-documented, and that you have considered how best to utilise tools already available to you, such as existing governance platforms.
- Strengthening Your ESOG: Identify any gaps in your existing system, via a gap analysis, and take steps to address them. This might involve updating policies, improving risk management processes, or enhancing governance structures.
- Ongoing Monitoring: Establish a system for regularly reviewing and updating your ESOG, including a mechanism for change-tracking. This will help you stay compliant with the Code and feed directly into your ORA assessment process.
The ORA is a structured assessment of a scheme’s governance and risk management practices. It is designed to ensure that the scheme is effectively identifying, assessing and managing risks, and that its governance arrangements are robust and fit for purpose.
Your first ORA report must be published in accordance with statutory requirements i.e. within 12 months beginning with the last day of the first scheme year that begins after the General Code came into force on 27 March 2024. For schemes with a year end of 31 March, the deadline for publication of the first report is 31 March 2026.
The reporting period for the first ORA should be based on the most recent completed scheme year. For example, a scheme with a year end of 31 March would assess the period from 1 April 2024 to 31 March 2025.
Going forward, TPR recommends conducting ORAs at least every three years, but schemes can choose to do them more frequently. The reporting period for future ORAs can be either the full three-year period since the previous report or the most recent completed scheme year, it’s completely up to the individual scheme.
Given that the ORA is a snapshot of a scheme’s risk profile at a specific point, schemes would be well advised to focus on the most recent completed scheme year. This provides a more up-to-date assessment and allows for targeted analysis.
It’s important to acknowledge and factor in any significant events or changes that occurred in the previous two years that might impact future risks. These events could include:
- Changes in the scheme’s investment strategy
- Regulatory developments
- Economic fluctuations
- Changes in the scheme’s membership or employer
- Significant legal or actuarial events
While TPR hasn’t explicitly mandated external audits of ORAs, it has emphasised the importance of independent oversight and robust governance in the risk management process. It is entirely up to each scheme to decide who prepares the ORA and whether to appoint a firm to carry out an external audit, but this is not a requirement, and many firms offering solutions can provide internal assurance checks.
While the General Code can be challenging, taking a practical approach and having the right support can make things easier for schemes. By keeping track regularly, gap analysis, and having independent oversight, risks can be managed more effectively and, ultimately, deliver better outcomes for members.
Kerry Merryweather - Director of Trustee Governance & Projects, ZEDRA Inside Pensions
This article was originally published
here by ZEDRA
