Key Functions
Pensions Act
64AH.
Key functions: general provisions
(1) The trustees of a scheme or trust RAC shall put in place the following key functions for that scheme or trust RAC:
(a) a risk management function;
(b) an internal audit function;
(c) where applicable, an actuarial function.
(2) The trustees of a scheme or trust RAC shall enable the holders of key functions to undertake their duties effectively in an objective, fair and independent manner.
(3) Subject to subsection (4), the trustees of a scheme or trust RAC may allow a person or persons to carry out more than one of the key functions.
(4) Subsection (3) shall not apply to the internal audit function referred to in subsection (1) of section 64AJ which shall be independent from the other key functions referred to in subsection (1) and shall be carried out by a person who does not carry out another key function in respect of the scheme or trust RAC.
(5) Subject to subsections (6) and (7), the trustees of a scheme or trust RAC shall not allow a person who carries out a key function referred to in subsection (1) for a scheme or trust RAC to carry out the same key function for the employer.
(6) Subject to subsection (7), the trustees of a scheme or trust RAC may, taking into account the size, nature, scale and complexity of the activities of the scheme or trust RAC, allow the same person, or persons, to carry out the same key function in both the scheme or trust RAC and the employer.
(7) The trustees referred to in subsection (6) shall not allow the same person, or persons, referred to in subsection (6) to carry out the same key function referred to in that subsection unless they have put in place a written protocol which explains how any conflicts of interest between the scheme or trust RAC and the employer are prevented or managed.
(8) A person who carries out a key function shall report any material findings and recommendations in respect of the key function concerned to the trustees of the scheme or trust RAC concerned.
(9) Where a report is made under subsection (8), the trustees of a scheme or trust RAC shall determine what action is to be taken in respect of that report.
64AI.
Key function: risk management function
(1) The trustees of a scheme or trust RAC shall establish and maintain an effective risk management function which shall comply with this section.
(2) For the purposes of subsection (1), the trustees referred to in that subsection shall establish and maintain the risk management function in a manner that is proportionate to –
(a) the size of that scheme or trust RAC and its internal organisation, and
(b) the size, nature, scale and complexity of the activities of that scheme or trust RAC.
(3) The trustees referred to in subsection (1) shall ensure that the risk management function referred to in that subsection is structured in such a way that facilitates the functioning of a risk management system for which those trustees shall adopt strategies, processes and reporting procedures necessary to ensure that the risks, at an individual and at an aggregated level, to which the scheme or trust RAC is or could be exposed and their interdependencies can be identified, measured, monitored, managed and be regularly reported on to those trustees.
(4) The trustees referred to in subsection (1) shall ensure the risk management system referred to in subsection (3) is effective and well integrated into –
(a) the organisational structure, and
(b) the decision-making processes of the scheme or trust RAC.
(5) The risk management system referred to in subsection (3) shall cover, in a manner that is proportionate to the size and internal organisation of the scheme or trust RAC concerned, as well as to the size, nature, scale and complexity of the activities of the scheme or trust RAC, risks which can occur in a scheme or trust RAC, or in undertakings to which tasks or activities of a scheme or trust RAC has been outsourced, at least in the following areas, where applicable:
(a) underwriting and reserving;
(b) asset-liability management;
(c) investment, in particular derivatives, securitisations, and similar commitments;
(d) liquidity and concentration risk management;
(e) operational risk management;
(f) insurance and other risk mitigation techniques; and
(g) environmental, social and governance risks relating to the investment portfolio and the management thereof.
(6) Where in accordance with the rules of the scheme or trust RAC, the members and beneficiaries of the scheme or trust RAC bear risks, the risk management system referred to in subsection (3) shall also assess those risks from the perspective of the members and beneficiaries.
(7) Where the person carrying out the risk management key function makes a report or recommendation to the trustees referred to in subsection (1), the trustees shall have regard to that report or recommendation.
(8) The trustees referred to in subsection (1) shall, as a general principle, have regard to the objective of having an equitable spread of risks and benefits between generations in their activities.
64AJ.
Internal Audit function
(1) The trustees of a scheme or trust RAC shall establish and maintain an effective internal audit function which shall comply with this section.
(2) The internal audit function referred to in subsection (1) shall include an evaluation of the adequacy and effectiveness of the internal control system and other elements of systems of governance including, where relevant, outsourced activities.
(3) Where the person carrying out the internal audit key function provides a report or makes a recommendation to the trustees of a scheme or trust RAC, the trustees shall have regard to that report or recommendation.
(4) The scope and detail of the internal audit function shall be proportionate to –
(a) the size and internal organisation of the scheme or trust RAC, and
(b) the size, nature, scale and complexity of the activities of the scheme or the trust RAC.
64AK.
Key function: actuarial function for regulatory own funds scheme and regulatory own funds trust RAC
(1) This section applies to –
(a) a regulatory own funds scheme referred to in section 53E, or
(b) a regulatory own funds trust RAC referred to in section 53E,
which provides cover for biometric risk, or guarantees an investment performance or a given level of benefits.
(2) Without prejudice to any other provision of this Act, the trustees of a regulatory own funds scheme to which this section applies, or a regulatory own funds trust RAC to which this section applies, shall establish and maintain an effective actuarial function to –
(a) co-ordinate and oversee the calculation of technical provisions,
(b) assess the appropriateness of methodologies and underlying models used in the calculation of the technical provisions referred to in paragraph (a) and the assumptions made for that purpose,
(c) assess the sufficiency and quality of the data used in the calculation of the technical provisions referred to in paragraph (a),
(d) compare the assumptions underlying the calculation of the technical provisions referred to in paragraph (b) with the experience,
(e) report to the trustees of that regulatory own funds scheme or regulatory own funds trust RAC on the reliability and adequacy of the calculation of technical provisions referred to in paragraph (a),
(f) express an opinion on the overall underwriting policy in the event of that regulatory own funds scheme or regulatory own funds trust RAC having such a policy,
(g) express an opinion on the adequacy of insurance arrangements in the event of that regulatory own funds scheme or regulatory own funds trust RAC having such arrangements, and
(h) contribute to the effective implementation of the risk management system.
(3) For the purposes of subsection (2), the trustees of a regulatory own funds scheme or regulatory own funds trust RAC referred to in that subsection, shall appoint at least one independent person, who satisfies the requirements of section 51, as an actuary to carry out the actuarial function referred to in subsection (2).
(4) For the purpose of making an appointment under subsection (3), the trustees of the regulatory own funds scheme or regulatory own funds trust RAC may appoint an independent person who –
(a) has been appointed to perform –
(i) in the case of a regulatory own funds scheme, the functions specified in sections 42(2) or 53J, or
(ii) in the case of a regulatory own funds trust RAC, the functions specified in section 53G or 53J, or
(b) is a person other than a person referred to in paragraph (a).
(5) Where, pursuant to subsection (2) –
(a) a report referred to in subsection (2)(e) is made to the trustees referred to in that subsection, the trustees shall have regard to that report, and
(b) an opinion referred to in subsection (2)(f) or subsection (2)(g) is expressed, the trustees shall have regard to that opinion.
Governance requirements: documents concerning governance
(s.
64AL)
64AL. Own-risk assessment
64AL.
Own-risk assessment
(1) The trustees of a scheme or trust RAC shall carry out and document an own-risk assessment of the scheme or trust RAC in accordance with this section.
(2) For the purposes of subsection (1), the trustees referred to in that subsection shall carry out and document the own-risk assessment in a manner which is proportionate to –
(a) the size and internal organisation of the scheme or trust RAC concerned, and
(b) the size, nature, scale and complexity of the activities of the scheme or trust RAC concerned.
(3) The trustees referred to in subsection (1) shall carry out the own-risk assessment referred to in that subsection –
(a) at least once every 3 years, and
(b) without delay following any significant change in the risk profiles of the scheme or trust RAC.
(4) The trustees of a scheme or trust RAC shall, when carrying out and documenting the own-risk assessment referred to in subsection (1), have regard to the size and internal organisation of the scheme or trust RAC concerned as well as to the size, nature, scale and complexity of its activities and include the following:
(a) a description of how own-risk assessment is integrated into the management process and into the decision-making processes of the scheme or trust RAC;
(b) an assessment of the effectiveness of the risk management system;
(c) a description of how the scheme or trust RAC prevents conflicts of interest with the employer, where the scheme or trust RAC outsources key functions to the employer in accordance with section 64AH(5);
(d) an assessment of the overall funding needs of the scheme or trust RAC, including a description of the recovery plan where applicable;
(e) an assessment of the risks to members and beneficiaries relating to the paying out of their retirement benefits and the effectiveness of any remedial action considering, where applicable –
(i) indexation mechanisms, and
(ii) benefit reduction mechanisms, including the extent to which accrued pension benefits can be reduced, under which conditions and by whom;
(f) a qualitative assessment of the mechanisms protecting retirement benefits, including, as applicable, guarantees, covenants or any other type of financial support by the employer, insurance or reinsurance by an undertaking covered by Directive 2009/138/EC or coverage by a pension protection scheme, in favour of the scheme or trust RAC or the members and beneficiaries;
(g) a qualitative assessment of the operational risks;
(h) where environmental, social and governance factors are considered in investment decisions, an assessment of new or emerging risks, including risks related to climate change, use of resources and the environment, social risks and risks related to the depreciation of assets due to regulatory change.
(5) For the purposes of subsection (4), the trustees of a scheme or trust RAC shall, subject to subsections (6) and (7), have in place methods to identify and assess the risks –
(a) to which the scheme or trust RAC is, or could be, exposed to in the short term and the long term, and
(b) which may have an impact on the ability of that scheme or trust RAC to meet its obligations.
(6) The trustees referred to in subsection (4) shall ensure that the methods referred to in subsection (5) are proportionate to the size, nature, scale and complexity of the risks inherent in the activities of the scheme or a trust RAC concerned.
(7) The methods referred to in subsections (5) shall be described in the ownrisk assessment.
(8) The trustees of a scheme or trust RAC shall take into account an ownrisk assessment carried out under this section in respect of the scheme or trust RAC concerned when making a strategic decision in respect of the scheme or trust RAC.
Chapter 2 Outsourcing and investment management (ss. 64AM- 64AO)
64AM. Outsourcing
64AN. Request by Pensions Authority in relation to section 64AM arrangement
64AO. Investment management
64AM.
Outsourcing
(1) Subject to subsections (2) to (5) and section 64AN, the trustees of a scheme or trust RAC may enter into an arrangement to entrust any activity, including –
(a) a key function, and
(b) the management of that scheme or trust RAC,
whether in whole or in part, to a service provider operating on behalf of the scheme or trust RAC concerned in respect of such activity, key function and management.
(2) Where the trustees referred to in subsection (1) enter into an arrangement referred to in that subsection, in respect of a key function or any other activity referred to in that subsection, the trustees of the scheme or trust RAC concerned shall, notwithstanding that arrangement, be fully responsible for compliance with their obligations under this Act in respect of any such key function or such activity.
(3) Where the trustees referred to in subsection (1) enter into an arrangement referred to in that subsection, in respect of a key function or any other activity referred to in that subsection, the trustees of that scheme or trust RAC shall satisfy themselves that the arrangement entered into by them shall not be undertaken in a manner that would lead to any of the following:
(a) impairing the quality of the system of governance of the scheme or trust RAC concerned;
(b) unduly increasing the operational risk to the scheme or trust RAC concerned;
(c) impairing the ability of the Pensions Authority to monitor the compliance of the scheme or trust RAC with its obligations under this Act;
(d) undermining the continuous and satisfactory service to members and beneficiaries of the scheme or trust RAC.
(4) The trustees referred to in subsection (1) shall ensure the proper functioning of any key function or activity, referred to in subsection (1), which is the subject of an arrangement referred to in that subsection and shall –
(a) in the process of selecting a service provider, have regard to the requirements of this subsection when selecting the service provider, and
(b) monitor, during the course of the period of the arrangement, the activities of that service provider.
(5) The trustees referred to in subsection (1) shall –
(a) when outsourcing pursuant to subsection (1), a key function, an activity or the management referred to in that subsection, enter into a written agreement with the service provider in respect of the arrangement under subsection (1), and
(b) provide that the agreement referred to in paragraph (a) clearly defines –
(i) the rights and obligations of the scheme or trust RAC concerned, and
(ii) the rights and obligations of the service provider, and subsections (6) to (9) shall apply to that agreement.
(6) An agreement referred to in subsection (5) shall be legally enforceable in a court of competent jurisdiction.
(7) Subject to subsection (8), the trustees referred to in subsection (1) shall notify the Pensions Authority of the making of an arrangement under subsection (1) not later than 4 weeks from the making of that arrangement.
(8) Where an arrangement concerns the outsourcing of a key function or the management of a scheme or trust RAC, the trustees of that scheme or trust RAC shall notify the Pensions Authority before the agreement in respect of that arrangement enters into force.
(9) The trustees referred to in subsection (1) shall, as soon as practicable, notify the Pensions Authority of any subsequent important developments with respect to any outsourced activities.
64AN.
Request by Pensions Authority in relation to section 64AM arrangement
(1) Where the trustees of a scheme or a trust RAC have entered into an arrangement referred to in section 64AM, the Pensions Authority may, by notice in writing, request –
(a) the trustees of the scheme or trust RAC concerned,
(b) the service provider concerned, and
(c) without prejudice to the generality of paragraph (b), a person who, on behalf of a service provider, performs, or carries out, any matter which is required to be performed or carried out pursuant to that arrangement,
to furnish it with any information, document or material relating to that arrangement within a period as the Pensions Authority may specify in the notice.
(2) A person to whom a notice under subsection (1) is given shall comply with the request set out in the notice.
64AO.
Investment management
(1) Nothing in this Act shall operate to restrict the trustees of a scheme or trust RAC from appointing, for the management of the investment portfolio of the scheme or trust RAC concerned, an investment manager established in another Member State which is duly authorised for carrying out such management in accordance with –
(a) Directive 2009/65/EC,
(b) Directive 2009/138/EC,
(c) Directive 2011/61/EU,
(d) Directive 2013/36/EU, and
(e) Directive 2014/65/EU.
(2) Nothing in this Act shall operate to restrict the trustees of a scheme or trust RAC from appointing, for the management of the investment portfolio of the scheme or trust RAC concerned, an authorised entity referred to in Article 2(1) of Directive of 2016.
Chapter 3 Depositary (ss. 64AP-64AU)
64AP. Appointment of depositary
64AQ. Depositary: safekeeping of assets and depositary liability
64AR. Depositary: oversight duties
64AS. Certain requirements where no depositary appointed by trustees of scheme or trust RAC
64AT. Conflict between Part and scheme or trust RAC
64AU. Application of Part to one-member arrangement: transitional provisions
64AP.
Appointment of depositary
(1) Where the trustees of a scheme or trust RAC appoint a depositary, any such appointment may be made in respect of a depositary established in another Member State and the depositary is –
(a) duly authorised in accordance with Directive 2013/36/EU or Directive 2014/65/EU, or
(b) accepted as a depositary for the purposes of Directive 2009/65/EC or Directive 2011/61/EU.
(2) Where the trustees of a scheme or trust RAC appoint a depositary –
(a) the trustees shall appoint the depositary by means of a written contract, and
(b) the contract referred to in paragraph (a) shall state that the trustees shall furnish the depositary with all the information that is necessary for the depositary to perform its functions provided for under this Part.
(3) Where the trustees of a scheme or trust RAC appoint a depositary, when carrying out the functions set out in sections 64AQ and 64AR the trustees and the depositary appointed shall act honestly, fairly, professionally, independently and in the interests of the members and beneficiaries of the scheme or
trust RAC.
(4) A depositary referred to in subsection (2) shall not carry out activities with regard to the scheme or trust RAC which may create conflicts of interest between the trustees of that scheme or trust RAC, the members and beneficiaries of that scheme or trust RAC and itself, unless –
(a) the depositary has functionally and hierarchically separated the performance of its depositary tasks from its other potentially conflicting tasks, and
(b) the potential conflicts of interest are properly identified, managed, monitored and disclosed, in accordance with subsection (5), to the members and beneficiaries of that scheme or trust RAC and to the trustees of the scheme or trust RAC concerned.
(5) For the purposes of the disclosure referred to in subsection (4)(b), to members and beneficiaries, where the depositary discloses, in accordance with subsection (4)(b), a conflict of interest to the trustees of the scheme or trust RAC concerned, the trustees shall –
(a) disclose that conflict of interest to the members and beneficiaries as soon as practicable after it is made to them, and
(b) as soon as practicable, notify the depositary, in writing, that it has made the disclosure to the members and beneficiaries under paragraph (a).
64AQ.
Depositary: safekeeping of assets and depositary liability
(1) Where the assets of a scheme or trust RAC consisting of financial instruments that can be held in custody are entrusted to a depositary for safekeeping, the depositary shall –
(a) hold in custody all financial instruments which can be registered in a financial instruments account opened in the depositary’s books and all financial instruments that can be physically delivered to the depositary, and
(b) ensure that the financial instruments which can be registered in a financial instruments account opened in the depositary’s books are registered in the depositary’s books within segregated accounts in accordance with the rules laid down in Directive 2014/65/EU, opened in the name of the trustees of the scheme or trust RAC, so that they can be clearly identified as vested in those trustees on behalf of the members and beneficiaries of that scheme or trust RAC at all times.
(2) Where the assets of a scheme or trust RAC consist of other assets that are not referred to in subsection (1), the depositary shall –
(a) verify, in accordance with subsection (3), that the trustees of the scheme or trust RAC are the owners, on behalf of the members and beneficiaries of the scheme or trust RAC, of the assets,
(b) maintain a record of those assets, and
(c) keep its records up-to-date.
(3) The verification required under subsection (2) shall be carried out on the basis of information or documents provided by the trustees of the scheme or trust RAC and, where available, on the basis of external evidence.
(4) A depositary shall be liable to the trustees of the scheme or trust RAC and the members and beneficiaries for any loss suffered by them as a result of its unjustifiable failure to perform its obligations or its improper performance of them.
(5) The liability of a depositary, referred to in subsection (4), shall not be affected by the fact that the depositary has entrusted to a third party all or some of the assets in its safe-keeping.
64AR.
Depositary: oversight duties
Where the trustees of a scheme or trust RAC have appointed a depositary for oversight duties, the depositary appointed for those duties, in addition to the obligations set out in section 64AQ(1), 64AQ(2) and 64AQ(3) shall –
(a) carry out instructions of the trustees of the scheme or trust RAC, unless those instructions conflict with any requirement under any enactment or rule of law or the rules of the scheme or trust RAC,
(b) ensure that in any transaction involving the assets of the scheme or trust RAC any consideration is remitted to the scheme or trust RAC within the usual time limits, and
(c) ensure that income produced by assets is applied in accordance with the rules of the scheme or trust RAC.
64AS.
Certain requirements where no depositary appointed by trustees of scheme or trust RAC
Where no depositary is appointed by the trustees of a scheme or trust RAC, for the purpose of –
(a) the safe-keeping of assets of the scheme or trust RAC and oversight duties or, as the case may be, the safe-keeping of assets, the trustees of that scheme or trust RAC shall make arrangements to prevent or resolve (or both) any conflict of interest in the course of performing tasks that are otherwise performed by a depositary and an asset manager,
(b) the safe-keeping of assets under section 64AQ, the trustees of that scheme or trust RAC shall –
(i) ensure that financial instruments are subject to due care and protection,
(ii) keep records that enable them to identify all assets of the scheme or trust RAC at all times and without delay,
(iii) take the necessary measures to avoid conflicts of interest in relation to the safekeeping of assets of that scheme or trust RAC, and
(iv) inform the Pensions Authority, on request, about the manner in which assets are being kept, and
(c) oversight duties referred to in section 64AR the trustees of the scheme or trust RAC shall implement procedures which ensure that tasks, otherwise subject to oversight by a depositary, are being duly performed within the scheme or trust RAC concerned.
64AT.
Conflict between Part and scheme or trust RAC
(1) The provisions of this Part shall override any rule of a scheme or trust RAC to the extent that that rule conflicts with those provisions.
(2) Any question as to whether any provision of this Part conflicts with any rule of a scheme or trust RAC, shall be determined by the Pensions Authority on application to it in writing in that behalf by a person referred to in subsection (3).
(3) The following persons shall be entitled to make an application under this section in respect of a scheme or trust RAC –
(a) in the case of a scheme –
(i) the trustees of the scheme,
(ii) any member or prospective member of the scheme, and
(iii) any employer of persons in relevant employment to which the scheme applies, and
(b) in the case of a trust RAC, the trustees or any member of the trust RAC.
(4) An appeal to the High Court on a point of law from a determination of the Pensions Authority under subsection (2) in relation to a scheme or trust RAC may be brought by the person who made, or a person who was entitled to make, the application concerned under subsection (2) not later than 6 months after the date of that determination of the Pensions Authority.
64AU.
Application of Part to one-member arrangement: transitional provisions
As respects a one-member arrangement established before the coming into operation of this Part, the provisions of this Part shall only on and from the expiry of 5 years from the date of such coming into operation apply to such one- member arrangement.