Systems of governance

General code in force: 28 March 2024

1. All pension schemes need to have systems of governance and internal controls that:
   1. provide the governing body with oversight of the day-to-day operations of the scheme
   2. include any delegated activities for which the governing body remains accountable
   3. provide the governing body with assurances that their scheme is operating correctly and in accordance with the law
2. The standards of governance required by law depend on the type of scheme the governing body operates.
3. Under section 249A of the Pensions Act 2004¹, governing bodies of certain schemes must establish and operate an effective system of governance including internal controls (see Internal controls). However, there are certain exemptions². The system of governance must be proportionate to the size, nature, scale, and complexity of the activities of the scheme.
4. Under section 249B of the Pensions Act 2004³, scheme managers of public service pension schemes⁴ are required to establish and operate internal controls, which are adequate for securing that the scheme is administered and managed in accordance with the scheme rules⁵ and with the requirements of the law.
5. A system of governance will include anything that can reasonably be considered part of the operation of a pension scheme. Internal controls  are a key feature of any system of governance and are:
   1. the arrangements and procedures to be followed in the administration and management of the scheme
   2. the systems and arrangements for monitoring the administration and management, and
   3. the arrangements and procedures to be followed for the safe custody and security of the scheme assets⁶
6. We have broadly the same expectations for each type of scheme (subject to the different legal requirements of s.249A and B). However, the standard required to meet those expectations frequently differs according to scheme type and size.
7. Where an expectation is different or applies differently in law for a specific type of scheme, this is made clear in this code. Where an expectation does not apply to a scheme because the law doesn’t apply, the governing body may wish to consider whether the principles should be adopted as good practice.
8. The systems and controls put in place by a scheme should be in proportion to its size, nature, scale, and complexity. This proportionality is a feature of legislation for some schemes⁷.

Effective system of governance

9. An effective system of governance should include processes and procedures to ensure compliance with the modules listed below.
10. Some of the modules only contain expectations for an effective system of governance (ESOG), and some contain expectations for ESOG and separate legal obligations. Expectations in respect of those legal obligations should be followed as part of ESOG as well as for wider legal compliance.
11. Where a module identifies a matter as good practice, this does not need to form part of the ESOG.
12. The expectations set out are subject to some exceptions for certain schemes, which are detailed in each module.
13. Management of activities:
    1. Role of the governing body
    2. Meetings and decision-making
    3. Remuneration and fee policy
    4. Knowledge and understanding
    5. Governance of knowledge and understanding
    6. Dispute resolution procedures
    7. Scheme continuity planning
14. Organisational structure:
    1. Appointment and role of the chair
    2. Conflicts of interest
    3. Managing advisers and service providers
    4. Risk management function
15. Investment matters:
    1. Investment governance
    2. Investment decision-making
    3. Investment monitoring
    4. Stewardship
    5. Climate change
    6. Statement of investment principles
16. Communications and disclosure:
    1. General principles for member communications

Internal review

17. Governing bodies should ensure that the elements of their ESOG are subject to a regular internal review. This should assess whether each element is functioning as intended, and whether changes are required.
18. Unless specified otherwise in law or code, each element of an ESOG should be reviewed according to a timetable established by the governing body. This review may be carried out as part of an own risk assessment if the governing body is required to do one of these. Otherwise, each element of the ESOG should be reviewed at least every three years. It is not necessary for all elements of an ESOG to be reviewed at the same time.
19. The governing body should establish and maintain policies for the review of each element of the ESOG. These policies should be established before any review is carried out and reviewed at least every three years.
20. An ESOG should have a process that ensures that any necessary changes are made to the ESOG or review policies.
21. Some options for formal internal audit and external assurance reporting are discussed in Assurance reports on internal controls, where this is considered necessary.

Own risk assessment

22. Governing bodies of schemes required to have an ESOG that have 100⁸ or more members should carry out and document an own risk assessment of their ESOG. This should assess how well the ESOG is working, and the way potential risks (see Internal controls) are managed.

Internal controls

23. The modules set out below contain systems, arrangements, or procedures that governing bodies should have in place to comply with the requirements for internal controls. They also apply to schemes required to maintain an ESOG. The expectations set out are subject to some exceptions or limitations in scope for certain schemes, which are detailed in each module.
24. Internal controls:
    1. Identifying, evaluating and recording risks
    2. Internal controls
25. Administration and management:
    1. Financial transactions
    2. Record-keeping
    3. Data monitoring and improvement
    4. Receiving contributions
    5. Monitoring contributions
    6. Maintenance of IT systems 

Legal references

¹ Article 226A of The Pensions (Northern Ireland) Order 2005

² Section 249A(3) of the Pensions Act 2004 [Article 226A (3) of The Pensions (Northern Ireland) Order 2005]

³ Article 226B of The Pensions (Northern Ireland) Order 2005

⁴ As defined in section 318(1) of the Pensions Act 2004 [Article 2(2) of The Pensions (Northern Ireland) Order 2005]

⁵ As defined in Section 318(2) of the Pensions Act 2004 [Article 2(3) of The Pensions (Northern Ireland) Order 2005]

⁶ Section 249A(5) of the Pensions Act 2004 [Article 226A(5) of The Pensions (Northern Ireland) Order 2005]

⁷ Section 249A(1A) of the Pensions Act 2004 [Article 226A(1A) of The Pensions (Northern Ireland) Order 2005]

⁸ Section 249A Pensions Act 2004 [Article 226A Pensions (Northern Ireland) Order 2005]