What will the ESOG ever do for us?

20th December, 2022

  • There’s a scene in Monty Python’s Life of Brian when Reg, the leader of the People’s Front of Judea, asks an apparent rhetorical question, “What have the Romans ever done for us?”  To his slight surprise and ultimate dismay, his audience responds with “the aqueduct”, “sanitation”, “roads”, “medicine”, “education”, “wine”, “public baths”, “public order” and “irrigation”. 

    If we jump forward a few years from today, will pension trustees be able to respond to a similar question “what has an ESOG ever done for us?” in such a positive way? 

    ESOG in a nutshell 

    Although the requirements of an Effective System of Governance (ESOG) have been around since the Pensions Act 2004, the Pension Regulator’s (tPR’s) Single Code of Practice, essentially the final part of the governance jigsaw, outlines that Trustees need to have processes, procedures and controls that supports their oversight of the operations of the Scheme. 

    The most likely first step for Trustees in assessing their existing governance structures will be by carrying out a gap analysis – a critical review of all of the Scheme’s procedures, policies, informal documents, controls, registers etc. And this must be more than a simple tick box exercise with “yes” or “no” answers – Trustees must understand what is or is not fit for purpose! 

    This is just the start though – it’s a baseline review.  What follows will determine whether the Trustees truly document their “SOG” as being effective. Merely recording that the Trustees have policies and procedures in place will not suffice. The Trustees will need to complete (if there Scheme has over 100 members) an annual own risk assessment (ORA) of their SOG – a critical ongoing review of how things are working and how potential risks are managed.  

    The Trustees must also find a way to ensure that their ESOG can evolve over time as Scheme characteristics change and also be a robust fall back for unforeseen circumstances, as well as being flexible enough to incorporate emerging risks. 

    Bring your ESOG to life at Trustee meetings 

    It’s very important that the Trustees’ ESOG drives every decision being made and that the Trustees make time to complete their ORA. There is no point doing all this good work, if Trustees just stick it on the shelf! Believe me, this represents a change for many trustee boards.  

    Trustees must make their ESOG part of their business as usual activities.  This can be achieved by embedding key aspects within their annual business plan and having standing agenda items to address aspects of their ESOG – and no, this does not mean tagging it on under AOB. 

    In fact, why shouldn’t every agenda item sign post the part of the Trustees’ ESOG that applies? This is a simple change that can link ESOG to all considerations and decision. 

    Ensuring ESOG supports urgent decisions 

    The recent LDI crisis has taught us that not every decision can wait until the next Trustee meeting. Many Trustees struggled to react quickly to the urgent demands placed upon them to re-collateralise their LDI portfolios, when gilt yields rose sharply during the autumn, exposing their Scheme to potential losses. 

    An ESOG should support urgent decisions due to unforeseen circumstances. The ORA should hopefully help to flush out potential risks too and identify the best way to mitigate them. 

    “So what will the ESOG ever do for us?” 

    If Trustees have taken the time to develop their ESOG and put in place a robust review process, just like poor Reg, instead of disdainful silence you might hear from the crowd…“timely decision making”, “succession plans”, “balanced investment strategies”, “appropriate funding outcomes”, “better informed members”, “value for money” and “better overall outcomes for all members” 

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    • Published byGregor Law

      Gregor is a professional trustee and actuary. He trained in Edinburgh with the Scottish Life Assurance Company, moving to Mercer in 2000, and then relocating to Northern Ireland. At Mercer, he attained his Scheme Actuary certificate, advising several NI-based clients....

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