The Final Code of Practice – where now?

Before considering the challenges now faced by employers and Trustees, it is worth reflecting on where the Code of Practice has landed. We want to look at the issues raised as part of the consultation process.

Proportionality

It was felt by a substantial number of responses that the requirements set out in the draft Code of Practice seemed excessive as a minimum, particularly for "smaller" schemes. In its commentary with the Final Code, the Pensions Authority referenced the Pensions Act provisions that refer to 'size, nature, scale and complexity' (from a supervisory and a Trustee obligation perspective), noting that they were taken into account in the preparation of the Code. Based on this, we can conclude that the Pensions Authority believes that the Code is appropriate, and not excessive for smaller schemes.

The Authority has been clear that the final Code of Practice represents a set of minimum requirements. The Pensions Authority has already signalled its expectation that the requirements of the Code will be impractical or not cost-efficient for many schemes.

The Authority has consistently communicated an expectation around the consolidation of pension schemes. The final Code is clearly supportive of that direction of travel.

Fit-and-proper trustees

The role of a Trustee has become more challenging in recent years, particularly for those who act in a voluntary capacity.

The bar is being raised higher. It has been argued that the extensive fit and proper requirements in the Code will discourage people from acting as a Trustee.

The final Code of Practice has gone further. It stipulated that at least one member of the Trustee board must have an appropriate formal Trustee qualification (those currently acceptable are courses run by the LIA or IIPM).

There is no ambiguity around the Authority's expectations here. They are seeking qualified Trustees with strong experience. Implicit in this is a "governance-first" approach, with the governance burden being significant.

Small Defined Benefit schemes

In many of the responses to the Consultation, concerns were raised that the new requirements may cause many "small" defined benefit schemes to wind up, jeopardising member benefits.

The Pensions Authority view is that smaller schemes are inherently more risky than larger schemes and that proper financial and risk management is equally applicable to them. It also questioned the sustainability of many of these schemes notwithstanding the IORP II requirements.

Without doubt IORP II will act as a trigger for employers to consider the sustainability of their defined benefit plans. In particular those schemes where the additional governance costs may be seen as disproportionate.

Cost-benefit analysis of requirements

Some responses to the consultation called out a lack of evidence to suggest a cost-benefit analysis of the new IORP II requirements had been carried out.

The time for this argument has now passed with the publication of the final Code. The Pensions Authority is of the view that the requirements are necessary to improve governance standards in occupational pension provision.

What will be important is for employers to assess the costs and benefits at their individual scheme level. This will be helpful in the context of the optimal future direction for their pension arrangements (e.g. changes to Trustee boards; consolidation of schemes; DB self-sufficiency; wind-up; PRSAs; Master Trust).

Transitional arrangements

Reference was made in the consultation responses to the existing bulk transfer regulations and wind up requirements acting as a disincentive to transitioning to an alternative arrangement; from both a timing and cost perspective.

In relation to timing, recent amendments to the bulk transfer regulations have shortened the timeframe for notifying transferring members of a proposed bulk transfer, from at least two months before the proposed transfer date, to at least one month.

In respect of the transfer and wind up costs, we are seeing a variety depending on the size of scheme and provider(s) involved. When considered against the costs of IORP II implementation and the potential savings on transition, a one year payback is typical.

The Pensions Authority is clear in its expectations for consolidation and a well planned market exercise can accommodate provider selection and transition in a three month window.

Challenges ahead

With the final Code now published, Trustees will now look to focus on how the gaps can be addressed during 2022. Assessing their own fitness and probity, completion of the ACS for 2021, documenting policies and procedures, establishing risk and internal audit functions are a few of the challenges.

It will be important for employers to be involved at this critical juncture as decisions will need to be taken on how the future of pension provision will look for its staff - making well informed decisions in early 2022 will ensure the solutions are fit for purpose.

The four key steps to take now

There are four key steps that should be considered in assessing the impact of the final Code of Practice and the future direction of pension strategy.

1. Trustees finalise gaps

Trustees will now be in a position to finalise those areas where work is required to comply. Trustees should look to finalise time and cost commitments associated with both the initial implementation and ongoing annual IORP II compliance (policies, Key Function Holders, Trusteeship etc.).

2. Liaison with employer on risk or cost impact

Having a clear analysis of the existing scheme structure and the impact of the requirements under IORP II will allow Trustees to engage with employers. Many of the additional costs and risks will ultimately be borne by the employer indirectly and they will need to be in a position to understand these.

3. Employer cost-benefit analysis

Employers will need to determine the cost-benefit associated with IORP II. For DB schemes, it will be about ensuring efficiency and minimising the impact of the additional costs whilst achieving value from any changes to Trusteeship and the new Key Function Holder roles. For DC schemes, consolidation will be a route considered by many - and this fits with the expectation of the Pensions Authority.

4. Future direction decision

By understanding the existing pension scheme structures, the final impact of IORP II regulations and associated costs and risks, employers will be in a position to objectively assess their future pension strategy options. For DB, it will be about how the scheme is managed into the future and its long-term funding and investment risks. For DC, it will be about whether their existing arrangements remain fit for purpose, or whether there is an alternative approach that may better serve them and their employees.

We are here to help you

The new regulatory regime is now live and 2022 will be an important year of transition for Trustees and employers. The key short-term priority for employers is to understand the full IORP II impact and identify a sensible path forward for future pension provision. Our PwC pensions team has the deep market knowledge to help you choose the optimal path. Contact us today.