TPR’s single code on “effective systems of governance”
TPR announced in July 2019 that it is working on a major project to combine all of its 15 codes of practice into a single shorter code of practice. The new single code is being put in place to address the requirements of new Governance Regulations. These new Regulations transpose the requirements of the second European Pensions Directive (IORP II) into UK law. The Regulations require schemes to put in place an “effective system of governance” which is proportionate to the size, nature, scale and complexity of the scheme’s activities. Schemes will also have to put in place a documented risk assessment. The new single code will set out TPR’s expectations of how to meet the requirement to have an effective system of governance and will be consulted on later in the year.
Future of trusteeship and governance
TPR has also issued a consultation paper called “Future of trusteeship and governance”, with the consultation running to 24 September. This builds on TPR’s 21st century trustee campaign from 2017 and 2018.
The focus of the consultation is on small DB and DC schemes where, in some cases, TPR sees that trustees are disengaged and not taking steps to improve governance. In the consultation paper, TPR asks the industry questions including:
· Should there be mandatory training or qualifications for all trustees?
· Should professional trustees be set higher standards?
· Should it be mandatory for an accredited professional trustee to sit on every board?
· Should boards have to report on what actions they are taking to ensure diversity?
· Should at least two trustees be required (rather than a sole trustee)?
TPR sets out plans to revise the code on Trustee Knowledge and Understanding (TKU), moving from the current “syllabus” approach to competency-based standards. The aim is to make sure TKU is simpler, clearer and easier for trustees to translate into good governance behaviours.
TPR states in the consultation paper that diverse groups are more effective at making decisions, but it has rejected the idea of having quotas for trustee boards based on gender and age. Instead TPR is asking the industry whether trustee actions to ensure diversity should be reportable to TPR.
What can schemes do to prepare?
Most schemes will be looking to achieve compliance with the Governance Regulations and TPR’s single code during 2021 and any changes coming out of the current consultation will not be implemented immediately. However, ahead of these changes, it is worth making sure that existing procedures are still fit for purpose and, as TPR suggests, looking at TPR’s expectations for scheme governance in the 21st century trustee guidance and most recent codes of practice. Areas to consider include:
- Policies and sub-committees - Some of your scheme’s policies and procedures may have been introduced some time ago so is it time they were reviewed and refreshed? For instance, have policies on conflicts of interest been looked at recently and are sub-committee terms of reference still appropriate if the job of the committee has evolved?
- Risk management and records – There will be increased focus on risk assessment and record keeping so does the scheme have an up to date risk register to which the various committees contribute? Is there a clear understanding of which committees are monitoring which key risks? Have data scores and any data gaps been discussed with your scheme administrators?
- TKU - Expectations will only increase here so are all trustees happy training is up to date and there are no gaps in knowledge? TKU training can take different forms: “on the job” training related to a decision that is coming up, or a refresher of the basics, especially when new trustees join. Have all trustees completed the TPR e-learning resource, the “trustee toolkit”?
- Diversity - What thought does the board give to succession planning and diversity? Often the sponsor selects trustees (other than MNTs) so it is worth discussing diversity and any “skills gaps” with the sponsor. Has the board looked at TPR’s skills matrix and board evaluation tool (or carried out another type of effectiveness review)?
- Strategic planning - Is the board acting strategically on the DB side? TPR is placing increased focus on long term planning and objectives and, as set out in the White Paper from June 2018, schemes will need to think about setting a long-term objective in a funding context. We are also expecting a consultation on TPR’s funding framework this year (with consultation on a new funding code in 2020). It is worth starting to think about your objectives now.
By reviewing scheme governance now, trustees can ensure they are on the front foot for compliance with new developments in this area.
Joanna Smith, Sackers.
