The government has made regulations introducing a new legal requirement for pension scheme trustees to operate an "effective system of governance", but the detail has been left to a Pensions Regulator code of practice which has not yet been published.

Background

The regulations stem from the EU directive "IORP II" which deals with the operation of occupational pension schemes.  IORP II itself is not directly binding on pension schemes, but EU member states are required to implement it by 13 January 2019.  The government has confirmed its intention to do this even though the UK is due to leave the EU shortly after this date.

What do the regulations require trustees to do?

The regulations, which come into force on 13 January 2019, require trustees of occupational pension schemes to operate an "effective system of governance" that is proportionate to the size and complexity of the scheme.  They apply to almost all occupational pension schemes except for authorised master trusts and certain public sector schemes.  However, for schemes with less than 100 members, the requirements will be less detailed and prescriptive.

The detail of what trustees are expected to do in order to comply will be set out in a Pensions Regulator code of practice which has not yet been published.  However, the regulations go into some detail regarding what the Regulator has to include in the code.

It appears that, regardless of scheme size, trustees will need to be able to show that they have a system for the sound and prudent management of the scheme, with appropriate and transparent allocation of responsibilities, effective systems for transmitting information and appropriate contingency plans.  That system will have to be subject to regular internal review.

Schemes with 100 or more members will, in addition, be subject to more prescriptive requirements.  For example, trustees will be required to have written policies, reviewed at least every three years on the scheme's "risk-management function", "actuarial function" and on the outsourcing of activities.  They will be required to document and carry out an "own-risk" assessment at least every three years which will have to cover a detailed list of matters, for example how the trustees prevent conflicts of interest with the employer where the scheme outsources key functions to a person employed by the employer.

What is the timescale for compliance?

Legally, the broad general requirement for trustees to operate an "effective system of governance" comes into force from 13 January 2019.  The more detailed requirements have been left to the Regulator's code of practice and the regulations themselves don't impose these requirement on trustees, but instead direct the Regulator what to cover in its code.  For the "own-risk" assessment, the regulations are specific as to the timescale that the code should stipulate, namely that the assessment will need to be prepared within 12 months from the end of the first full scheme year after the Regulator has issued its code, or if later, by the deadline for producing the next actuarial valuation or annual governance statement.  Presumably, the Regulator will also make clear in its code the timescale within which it expects trustees to comply with any other provisions of the code.

Our thoughts

Until the Regulator's code has been published, it seems premature to put in place detailed compliance plans.  However, trustees should keep this issue on their radar and be ready to act once the code is published.

There had been speculation over how Brexit might affect the UK's implementation of IORP II, so the government's confirmation of its position is helpful.  Scheme governance is not the only issue covered by IORP II.  Another significant area where we can expect to see regulations is in respect of the IORP II requirement to make annual benefit statements available to all members.  This will in particular be a significant change for many defined benefit schemes which may not currently have a practice of sending annual benefit statements to deferred members.