Effective System of Governance – What you need to know

ESOG: Overview & how it enhances pension scheme management.

With the new General Code of Practice, The Pensions Regulator (TPR) mandated the need for an Effective System of Governance (ESOG) as a key part of pension scheme management.

In this article, we explore the ESOG, detailing what you need to know, and how it impacts the governance of pension schemes.

ESOG illustrative image of two people looking at a computer screen with icons showing elements of an effective system of governance

Understanding the Effective System of Governance (ESOG)

At the heart of the Effective System of Governance is a further commitment to enhancing the accountability and effectiveness of pension scheme management.

The ESOG encompasses a set of principles and practices aimed at ensuring that pension schemes are managed with the utmost diligence, transparency, and in accordance with the best interests of the beneficiaries.

Further, the General Code of Practice highlights that a scheme’s ESOG be proportionate to the size, nature, and complexity of the activities of the pension scheme.

Plus, that the ESOG itself needs to be reviewed for efficiency, effectiveness, and efficacy at least every three years. Sooner, and immediately, if a significant change occurs in the pension scheme.

Key Components of the ESOG

The ESOG comprises several key components, each designed to strengthen the framework within which pension schemes operate:

Risk Management

The General Code of Practice emphasises the importance of the ESOG identifying, assessing, and managing risks associated with the pension scheme.

This can range from investment strategies that might be too adventurous (or too timid) to operational issues that could cause disruptions, such as cyber security, IT systems, and governing policies.

Identifying these risks is half the challenge; the other half is crafting strategies to mitigate them.

This proactive approach to risk management ensures that potential issues are addressed before they escalate, contributing to the overall stability of the scheme.

Internal Controls

Robust internal controls are essential for the ESOG.

The new Code mandates the implementation of comprehensive control mechanisms to prevent errors, fraud, and mismanagement, thereby enhancing the reliability and integrity of the scheme.

Again, as stated above, the Code expects a scheme’s ESOG to be proportionate to the size, nature, and complexity of the pension scheme it is supporting.  

Accountability and Decision-Making

Clear lines of accountability and transparent decision-making processes are critical components of the new governance system.

These elements ensure that decisions are made in the best interests of the beneficiaries and that there is clarity regarding the roles and responsibilities of those involved in managing the pension scheme.

The ESOG should detail these processes with roles, personnel, and responsibilities indicated as appropriate.

Stakeholder Engagement

The ESOG encourages active engagement with stakeholders, including scheme members, employers, and regulatory bodies.

This engagement ensures that the interests and concerns of all parties are considered in the governance of the pension scheme.

Regular Review and Adaptation

The nature of the pensions industry necessitates regular reviews and adaptations of governance practices.

The new code requires pension schemes to assess their ESOG at least once every three years, making necessary adjustments to remain compliant and effective.

Own Risk Assessment (ORA) – a key part of the ESOG for schemes with 100+ members

A key sub-component of the ESOG is the Own Risk Assessment (ORA) which is mandated in the General Code of Practice for schemes with 100 or more members.

It also needs to be completed within 12 months of the new Code coming into effect for the scheme.

The ORA is effectively an internal test of the ESOG, designed to ensure that the ESOG is functioning as intended.

Think of it as similar to the requirement to carry out an internal audit for ISO9001 etc. certifications.

When the trustees have reached the point where their ESOG is up and running, the ORA details how they manage the scheme’s governance and its risk, explaining why they believe these are appropriate.

The ORA is requiring trustees to answer questions such as

  • Is the ESOG practically effective?
  • Does it help manage risk, and how does it achieve this?
  • Is the EOSG working as expected?
  • What have been the biggest risks and how have they been managed?

While producing and maintaining the ORA is an additional task, its goal is to help the governance of the scheme and highlight improvements, through what amounts to an annual fitness check and review of the ESOG.

Impact on Pension Scheme Management

The introduction of the ESOG represents a sizeable shift in how pension schemes are managed.

It underscores the importance of high standards in governance, with a focus on ensuring the long-term sustainability and security of pension benefits.

For trustees and managers of pension schemes, this new framework provides clear guidelines and expectations, promoting a more structured and accountable approach to pension scheme governance.

While many will already have good systems of governance in place, this new approach will raise the standards for all pension scheme management.

Conclusions on the ESOG

TPR’s primacy of the importance of an ESOG in the General Code of Practice is another testament to the evolving landscape of pension scheme management.

By implementing this comprehensive framework, the regulator aims to enhance the reliability, transparency, and effectiveness of pension scheme management, ultimately benefiting all stakeholders involved.

As pension schemes adapt to this new system, they are set to become more resilient, secure, and aligned with the best interests of their members.

How Assure UK can help with your ESOG

With the General Code of Practice being published in January, and due to come into effect from March 27, 2024, we highly recommend that pension trustees conduct a gap analysis of their current system of governance against the requirements for the ESOG.

This will spotlight work that needs to be done, discussions that need to be had, and details that need to be recorded.

Assure UK, with our specialist expertise in pension scheme audits, is available to help, advise, and work with trustees to conduct such gap analysis and set up their ESOG.  

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