2021 and all that!
21st December, 2021
1066 2021 and all that!
Many of us who were writing 2020 reviews of the year were looking forward nervously and hopefully to 2021. The timing of these things is such that most such reviews were written before Downing Street cancelled Christmas for everyone but Downing Street.
The guarded optimism and hope for renewal in 2021 that many of last year’s reviews expected or, perhaps more accurately, yearned for, was washed away by the second wave of the pandemic and a second even longer national lockdown.
But as with life itself, the pensions world continued to turn inexorably, and the industry continued the work of looking after members and delivering secure retirement outcomes in challenging times.
When it came to drafting this year’s review, I thought I would Google “what is the most significant year in history?”. I clearly hadn’t thought it through as what became rapidly apparent was that every year is significant from somebody’s perspective, and there isn’t really an empirically agreed definition of what “significant” means in this context. Though there does appear to be a consensus the 534 AD was the least significant year in history. According to my Google research the only thing that happened in 534 AD was that, on 16 November that year, the second and final revision of the Codex Justinianus was published. Now I’m sure it was significant for Justinianus and I’ll bet his mum was very proud, but I think we can agree that, for the rest of us, not very significant.
Looking back over the course of 2021 there have been a number of changes, proposed and actual, that will help shape the pensions landscape for years to come.
Pension Schemes Act 2021
The Pension Schemes Bill was approved by the House of Lords on 19 January 2021 and received Royal Assent on 11 February 2021, becoming the Pension Schemes Act 2021 (the Act) and the first Act of Parliament for the year. During the course of 2021, secondary legislation has been introduced giving effect to many of the key aspects of the Act.
Amongst the key aspects of the Act are measures to enhance The Pension Regulator’s (TPR’s) powers to protect defined benefit schemes in relation to corporate transactions, the establishment of a new funding regime, the creation of pension dashboards, Collective Money Purchase schemes, climate change reporting obligations for trustees and increased powers for trustees to protect members from scams by restricting the statutory right to transfer in certain circumstances.
Any one of these is a significant measure with an impact on the governance and operation of many pension schemes.
Single Code of Practice
And governance is a key theme of another significant 2021 consultation impacting pension schemes – TPR’s proposal for a single Code of Practice. TPR’s consultation was launched in March 2021 and proposed that a single new code will eventually replace 15 of its existing codes of practice, which deal mainly with the governance, funding and administration aspects of pension schemes. The consultation also incorporates changes introduced by the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018, relating to effective systems of governance (ESOGs) and own-risk assessments (ORAs).
It was originally anticipated that the new Code of Practice would have been brought in around now. However, in its interim response to the consultation on the new Code, TPR confirmed that it does not currently have a firm final publication date and does not expect the code to be laid before Parliament before spring 2022. It is, therefore, unlikely to become effective before summer 2022.
ESOG and ORA
Whilst ESOG’s and ORA’s may sound like entities from the obscurer parts of Middle Earth, they are very real, and the single code introduces the requirement for occupational pension schemes to establish and operate an effective system of governance , including internal controls.
The ESOG must be proportionate to the complexity, scale and organisational structure of the scheme, and to the nature of the risks that the scheme is exposed to. It must be reviewed every three years and a policy must set out the scope of that triennial review.
In practice, the ESOG will be formed of the trustee’s governance policies and procedures. Then on an annual basis, trustees of schemes with 100 or more members will need to prepare a written assessment addressing:
- how they have assessed the effectiveness of their policies and procedures; and
- whether and why they consider their policies and procedures to be effective.
As is the case for TPR’s existing codes of practice, the Code will not be legally binding. That said, compliance with the Code would be taken into account by TPR in determining compliance with statutory requirements.
Climate risk reporting
Also this year, the UK became the first major economy to require climate risks to be considered and reported on by pension schemes. With effect from 1 October 2021, the requirements applied to larger pension schemes with assets greater than £5bn and authorised master trusts. From 1 October 2022, schemes with assets over £1bn are in scope and it’s likely that the requirements will be further extended to smaller pension schemes over time.
Trustees are, or will be, required to take action in a number of areas, covering how they consider the impact of climate change on the governance of, and strategy, of their schemes, and to establish and maintain processes that enable them to identify, assess and effectively manage climate related risks. Trustees must also select a minimum of three metrics, two of which are prescribed: one giving total greenhouse gas emissions of the scheme’s assets and one giving total carbon dioxide emissions per pound of assets invested.
There is a challenge for the investment industry in ensuring that it can provide credible and reliable reporting on climate change to enable trustees to meet their obligations in this area.
It is worth highlighting that the Government has been at pains to point out that the measures are not intended to direct pension scheme investment in any way. The purpose is to ensure there is effective governance of occupational pension schemes with respect to the effects of climate change and to require associated disclosures.
Many schemes are well governed but the discipline of formally documenting and systematically reviewing scheme governance will be a sea change for many trustee boards. For that reason, the blueprints laid out in the Act and Single Code of Practice mean that, at least for UK pension schemes, arguably 2021 is the most significant year in history. Well, at least since 1995 … on a lighter note, 2021 also saw Dalriada’s house rock band, Run GMP, release its first album.
And you can enjoy our Christmas release here:
That probably means 2021 trumps 1995. Unarguably!