Pensions Cake

Many pension scheme trustees and employers aspire to undertake a risk transfer transaction, typically an insurance company buy-out for defined benefit (DB) schemes or a transfer to a master trust for defined contribution (DC) schemes. In each case, this will ultimately herald the termination of the pension scheme and an end to all governance systems. Recent improvements in scheme funding mean that some DB schemes are reaching that point earlier than expected. For example, what could have been a five-year path to buy-out may now be a two-to-three-year journey plan. 

This means that many trustees are now considering to what extent general code compliance needs to be factored into the end game. Does an effective system of governance (ESOG) need to be built regardless? With the first “own risk assessment” (ORA) not due until Spring 2026 (at the earliest), what needs to be done in relation to schemes that will have wound-up by then or those nearing the finish line?

Timing Is of the (Vanilla) Essence

The timing on introduction of ORAs means that no formal assessment of how an ESOG is performing is required before Spring 2026. However, the general code cannot be ignored until then. It is already in force and so trustees can be called out if their governance lets them down in the meantime. There is the potential for regulator spot-checks, questions being asked in the context of other regulator interventions and (possibly) for progress reports to be required through scheme returns or other regulator engagement. As such, trustees are taking a risk if they are not starting to review and enhance their governance arrangements.

In our view, to avoid undertaking an ORA in 2026, a DB scheme would need to have bought-in, triggered wind-up, converted to buy-out and then completed the wind-up and terminated the scheme before the ORA due date. If any stage of that process is incomplete at the time that the ORA is due, then an ORA will be required. So for example, a scheme that has fully bought out but still has to arrange Guaranteed Minimum Pension equalisation top-ups for former members before it can wind-up, will still be in scope for an ORA.

This analysis significantly reduces the number of schemes that will never need an ORA. However, whether or not an ORA will ultimately be required, we recommend that schemes in or approaching their end game should still be working on their ESOG, albeit adopting a proportionate approach.         

When Your Cake Is Almost Baked, What Do You Knead to Do?

Readers of the first blog in this series may recall the evolution of “proportionality” from the underlying legislation to the general code in its final form. In our view, the concept has broadened over time and now captures more scenarios than originally thought. We consider that, when trustees form a view on what is “proportionate, reasonable and suitable” for their scheme, they can take account of the scheme having a relatively short shelf life and take a selective approach. But what does this mean in practice?

In our view, the first priority should be to address matters that could derail the end-game project. Given the vast majority of data that needs to be transferred to facilitate such a project, cyber risks (faced by the scheme administrator, the employer or the insurer) should be at the top of trustee agendas. The general code states that a scheme’s internal controls need to include measures to reduce cyber risk. The general code also states that trustees should “maintain a cyber incident response plan”. Therefore, these policies should be prioritised by supplementing data protection arrangements already in place.

By contrast, trustees may have confidence that other situations will not materialise in the scheme’s remaining time frame. For example, a succession plan for the chair of trustees may be considered unnecessary if the incumbent fully intends to see the project through to its conclusion.

A sensible approach to this would be for trustees to list out all the policies and procedures referenced in the code and then to re-order them by reference to the likelihood of them being relevant to the scheme. The documents can then be categorised as important, light touch or not required, for the purposes of ESOG planning.       

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