Welcome to our new blog series exploring the various ingredients that go into a successful general code of practice compliance programme. We have been cooking up a range of strategies over the last couple of years and are now happy to share our recipe for success!

Background

The general code sets very high standards for pension trustees in terms of the breadth and depth of their governance arrangements. Large, complicated and ongoing schemes will be expected to address each aspect that is relevant to them – there are over 50 elements in total. Thankfully for other schemes there are grounds for trustees to formulate a proportionate approach, taking account of the specific circumstances of their scheme. But what does proportionality look like and in which circumstances might it be available to trustees?

The Original Concept

The 2018 Governance Regulations (which amended the Pensions Act 2004) required The Pensions Regulator (TPR) to develop a code of practice. The regulations set out the key elements that should be included in the code, including the effective system of governance and the own risk assessment. They also specifically provided grounds for proportionality by inserting a new provision into section 249A of the Pensions Act 2004:

“The system of governance must be proportionate to the size, nature, scale and complexity of the activities of the occupational pension scheme.”

The First Attempt

When TPR first published the draft single code (as it was then called) on 17 March 2021, the code expanded on the legislative grounds for proportionality. References to proportionality were dotted throughout the code and the general introduction provided that:

“….the code is not prescriptive about methods that governing bodies should use to meet our expectations, in recognition that different approaches may be appropriate for different schemes. Governing bodies need to use their judgement as to what is a reasonable and proportionate method of ensuring compliance for their scheme.”

The Final Form

Over three years later, on 28 March 2024, when the general code finally came into force, the language around proportionality had evolved further. While the term “proportionate” is still used throughout the code (largely with reference to size of schemes), the general introduction now reads:

“Governing bodies need to use their judgement as to what is a reasonable and suitable method of ensuring compliance for their scheme.”

Where Does This Leave Trustees?

You will have observed how the language has expanded since first inception, from a narrow formulation of “proportionate” to a broader concept of “proportionate, reasonable and suitable”. While the original language can be traced back to the underlying legislation, which cites the size, nature, scale and complexity of the activities of the occupational pension scheme as grounds for exploring proportionality, the meaning of the additional words “reasonable and suitable” are not explained or defined. This may open up further grounds for trustees to “take a view” on what is necessary and appropriate for them. In addition to considerations around size and complexity, it potentially opens up other grounds for taking a light touch approach in certain areas. For example, it may support trustees taking a selective approach to general code compliance where a scheme is nearing wind-up or where it has streamlined governance arrangements as a result of having a sole professional trustee.