IORP II – The Pensions Authority publishes final Code of Practice
IORP II full compliance picture revealed: we discuss the Pensions Authority's final Code of Practice and next steps for employers and trustees.

 

The Pensions Authority (Authority) has now published its finalised Code of Practice (Code) detailing expectations for pension trustees' compliance with applicable obligations under the European Union (Occupational Pension Schemes) Regulations 2021 (Regulations).  The Code represents critical, outstanding guidance which will facilitate pension trustees' progression and finalisation of IORP II compliance plans.  

The Code makes several changes to the Authority's draft code published in July (discussed here), key of which are set out below.

1. Proportionality 

One of the principal concerns with the draft code was its framing as the Authority's minimum expectations for all schemes regardless of their size, without any dilution of requirements on proportionality grounds.  Apart from excluding death benefit only, pay-as-you-go and single member schemes (until 2026), the Code does not provide for proportionate compliance with the minimum expectations and instead states that it is for trustees to decide how best to organise their scheme, including the various policies and procedures they must have in place, "once all requirements are addressed".

2. Fit and Proper (F&P)

The Authority has also confirmed details of two trustee qualification courses which it regards as satisfying the trustee qualification element of the "fit" requirements within the F&P standard.  

Separately, there has been some dilution of the criteria that would be regarded as adversely affecting someone's ability to meet the "proper" standard. For instance, regulatory investigations are no longer necessarily such an indication.  

The Code also confirms that, in determining whether trustees meet the F&P standard, trustees may rely on the veracity of information provided by their fellow trustees.  In effect, this means that the F&P regime will operate on a self-certification basis and there is no expectation, under the Code, for trustees to verify that information.  

The Code puts an onus on trustees to communicate with employers where they determine that a proposed new trustee does not meet the prescribed F&P standards.  If an employer proceeds to make the appointment anyway, the Code requires trustees to inform the Authority. This is helpful as it acknowledges that in practice trustees do not generally control trustee appointments.

3. Key Function Holders 

The Code confirms the Authority's view that a named individual must be appointed to key function holder (KFH) roles. Therefore, trustees must be satisfied that the named individual meets the F&P requirements.  

The Code refines the "fit" requirement for the risk management KFH such that a level seven National Framework Qualification or "equivalent professional qualification", which the trustees consider relevant, will be satisfactory.  This broadens the potential category of appointees for that role.

The Code confirms that in determining whether KFHs meet the F&P standard, trustees may rely on the veracity of information provided by proposed appointees.  There is no expectation under the Code for trustees to verify that information.  

4. Internal Audit

The Code narrows the scope of the internal audit role and confirms that it should cover, among other things, scheme administration, where this is preformed in-house, and trustee investment decisions; it does not cover external administrators or investment managers. The internal audit policy no longer needs to specify the professional standards to which trustees expect internal auditors to adhere, broadening the category of person who may be appropriate for appointment to the internal audit role.  

5. Investment and Administration 

The Code clarifies that the Statement of Investment Governance which trustees must adopt is separate to their obligation to prepare a SIPP.  The Statement of Investment Governance is designed to set out a governance process whereby investment objectives and strategy will be decided upon and implemented.  

The Code also places greater emphasis on the need for trustees to be mindful of conflicts when it comes to investment advisers. It highlights the importance of independent advice when it comes to the appointment of investment managers, and the need to understand and compare costs and capabilities as between investment managers.  

In the case of both investment managers and administrators, the Code confirms that the triennial critical review, which trustees must carry out of those service providers, does not automatically require trustees to initiate a tender process; it is an in-depth review of the service providers performance against the agreed performance benchmarks or their obligations in the relevant SLA.  Where incumbent providers are retained, trustees must document the reasons why.

6. Outsourcing 

The Code clarifies that the requirement to have a legally binding contract in place with outsourced providers also extends to external advisers.  Most schemes will have written contracts in place with outsourced providers, but trustees will now need to check that those contracts contain the minimum terms prescribed by the Code. 

7. Member Engagement

The Authority has recommended trustees be mindful of the consent requirement under e-commerce legislation when providing disclosure documents to members electronically.  Schemes planning to move to electronic-based disclosure will therefore need to put in place arrangements to document that consent where necessary.

Next Steps  

The Authority has stated that it will be enforcing full compliance with the Regulations by the end of 2022.  Now that the Code has been published, trustees should put a plan in place to address the requirements of the Regulations, as supplemented by the Code, with a view to ensuring full compliance in the course of 2022.  Trustees should also engage with the scheme sponsor on the increased costs arising from IORP II compliance.  If those costs render existing schemes unviable, employers will need to arrange an alternative vehicle for future pension provision; which would require careful planning and several months to implement.

If you would like to discuss any of the issues addressed in this briefing, please contact Ian Devlin, Ciara McLoughlin or your usual William Fry contact. 

 

 

Key Contacts

Ian Devlin Partner

Ciara McLoughlin Consultant

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