The act is wide-ranging and includes a new funding regime for defined benefit (DB) schemes; new criminal offences; the introduction of collective defined contribution (DC) schemes and pensions dashboards; and provisions to tackle climate change.
Although very little of the wording of the legislation has changed since the original bill was published in October 2019, we have learned a lot about the government's intentions in the intervening period. Much consultation, regulation and guidance are still to come before the various provisions take effect, but trustees and employers can now take stock and prepare.
The new regime is intended to clarify how DB schemes should be funded, and is likely to result in higher funding levels in practice.
The new regime is founded on some new principles and a two-prong approach to scheme valuations. The Pensions Regulator (TPR) published a consultation on the approach and guiding principles for its new DB funding code of practice in March 2020, and is still analysing the responses to that consultation. A second consultation on the details should appear in autumn 2021, and the new regime is expected to be introduced in 2022.
TPR's new core funding principles include:
TPR is proposing a twin-track compliance route to carrying out valuations. Trustees wanting to follow the 'fast track' will need to meet all the parameters set out in a new funding code covering areas such as the long-term objective; technical provisions (including discount rates and possibly other assumptions); recovery plan length and structure; investment risk; and, for open schemes, future service contribution rates. Trustees following the fast track route will need to declare that their valuation is compliant.
The regulator is yet to consult on the fast track parameters. Until these have been fixed, it cannot be certain how many schemes might adopt the fast track route. Schemes that are unable to meet all the fast track parameters, or that wish to preserve greater flexibility, will need to follow a 'bespoke' route. TPR expects that the bespoke route will also appeal to schemes wanting to take additional, managed risks or to pursue funding solutions which don't satisfy all the fast track parameters even if they offer as good an outcome.
Much consultation, regulation and guidance are still to come before the various provisions take effect, but trustees and employers can now take stock and prepare.
One of the major concerns about the new funding regime had been the potentially detrimental impact on open DB schemes, leading to some being forced to close. On the final day of parliamentary debate on the Pension Schemes Bill, the government confirmed that these concerns would be addressed in the regulations. Open DB schemes will not be forced to invest in the same way as closed schemes. Former pensions ministers and the pensions industry in general have welcomed this concession.
The Act introduces a number of new criminal offences. There are also a number of new civil offences including knowingly or recklessly providing false information to trustees; and non-compliance with funding standards.
The first of these criminal offences arises where a person intentionally avoids an employer debt, and had no reasonable excuse for doing so. This wording is potentially wide enough to catch normal behaviour; such as preventing an employer debt from arising by carrying out a corporate rescue, or implementing an apportionment arrangement.
The second new criminal offence arises where a person's conduct detrimentally affects the likelihood of members receiving their accrued benefits, where that person knew or ought to have known the effect of his or her conduct, and had no reasonable excuse for that conduct. Again, the wording could potentially catch normal behaviour; such as business transactions by the employer that reduce its net assets in return for a future commercial gain, or even the payment of a transfer out of the scheme by trustees. A person could commit the offence without any ill intent - for example, where the offender fails to realise the effect of his or her conduct but should have realised it.
Scheme advisors and others who knowingly assist in the criminal conduct could also be caught. Where there is a risk of committing a criminal offence, trustees, employers and their advisors will have a shared interest in seeking additional reassurance before proceeding with standard transactions – potentially causing costly delay.
The third new offence is relatively uncontroversial. It arises where a person knowingly or recklessly gives TPR false or misleading information about a notifiable event. The existence of the offence should have the positive impact of ensuring that employers and trustees take their dealings with the regulator seriously.
The fourth new offence arises if a person fails to comply with a contribution notice without a reasonable excuse. The general aim of a contribution notice is "to recover any losses caused to a DB pension scheme as a result of avoidance behaviours". Contribution notices can be enforced in civil courts, but the intention of the new offence is to give TPR more muscle.
Two new additional tests will allow TPR to issue contribution notices: the 'employer insolvency test' and the 'employer resources test'. The insolvency test is a bit of a misnomer: it focuses on whether there has been a material reduction in the amount that could be recovered from an employer if a hypothetical insolvency had arisen. The resources test looks at whether an employer's resources have been reduced in a material way taking into account the amount of any employer debt. It is currently unclear how these new tests might work in practice.
The risk is that these new offences will lead to everyone involved with a DB scheme becoming overly cautious about their actions - from trustees to bankers, purchasers and advisers. Nervousness about the offences will also lead to more parties taking legal advice with the associated additional costs, bureaucracy and delays.
TPR has the considerable challenge of discouraging reprehensible behaviour while avoiding unintended consequences. It will need to publish new guidance on what will and will not give rise to criminal proceedings, and what will constitute a reasonable excuse. The guidance will be welcome, but will not trump the law. We are not expecting the new offences to take effect until the guidance has been published.
The legislation amends the notifiable events framework. In particular, a pension will have to provide an 'accompanying statement' setting out prescribed information when notifying certain events to the regulator. The government's original intention had been to use this power to require employers of DB schemes to send a 'declaration of intent' to the scheme trustees and TPR in advance of certain corporate transactions. This declaration would need to set out the impact of the transaction on the DB scheme and how the employer intends to mitigate any risks to the scheme.
We now need to wait for regulations to see whether the government is going to implement declarations of intent as originally planned. If so, these could end up having a significant impact on future corporate transactions as they would allow the regulator to become involved even where the parties choose not to seek clearance. Although TPR would need to review its clearance guidance as part of these reforms, declarations of intent would not become a substitute for clearance.
The Act also gives TPR enhanced information-gathering powers, for example a power to call certain persons for an interview; and powers to enter a wider range of premises.
The Act allows the government to make regulations on when and how pension schemes should be required to adopt enhanced governance requirements and report in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Pension scheme trustees will need to put in place effective governance, strategy, risk management and accompanying metrics in relation to climate risks and opportunities. The Department for Work and Pensions has recently published draft regulations and statutory guidance for consultation.
Schemes with assets of at least £5 billion, all authorised master trusts and all authorised collective DC schemes will need to comply from 1 October 2021, when the new regulations are expected to come into force. Other schemes with assets of at least £1bn will need to start complying a year later. The government will consider whether to include smaller schemes in 2023.
The new requirements are not just about disclosure. They are about making trustees adopt effective governance systems so they can properly assess and understand what climate change actually means for their particular scheme.
The new requirements are not just about disclosure. They are about making trustees adopt effective governance systems so they can properly assess and understand what climate change actually means for their particular scheme. The larger schemes, which will have to comply first, will be able to use their market power to drive best practice from asset managers and advisers, and will make it easier to roll out the requirements to smaller schemes in due course.
The Act allows members' statutory right to a transfer to be restricted in order to combat pension scams. The government intends to consult shortly on regulations specifying these restrictions.
Members are likely to lose the statutory right to transfer to an occupational scheme, other than an authorised master trust, if there is no "genuine employment link" between the member and the scheme. Other 'red flags' that might halt a transfer could include the member being pressurised to make the transfer, or parties involved in the transfer not having appropriate FCA permissions. Members are likely to be required to obtain guidance if a 'red flag' is identified.
Collective defined contribution (CDC) pension schemes are like normal DC pension schemes to the extent that the employer has no obligation to pay more than a set level of contributions. However, assets are pooled between members, and actuaries calculate what level of pensions should be payable.
The Act provides a framework within which these schemes will be regulated. CDC schemes, referred to as 'collective money purchase schemes', will need to be authorised, in a way similar to master trusts. Authorisation will cover actuarial practices in relation to calculating members' benefits. Only schemes set up by single employers, or groups of connected employers, will be allowed, although there is power in the Act to make regulations to change this.
Member communications will be key to ensuring that members understand how these new schemes operate, given the risk that pensions in payment may be reduced if funding levels fluctuate.
The Act enables pension dashboards to be set up. The aim is to allow members to see all their pension savings on a single online platform. Trustees of occupational pension schemes will be required to provide standardised benefit information to the pensions dashboard providers. The FCA will impose similar requirements on personal pension providers.
Schemes will need to keep these developments under review and be prepared to provide data to the dashboards once this becomes necessary. The Money and Pensions Service's Pensions Dashboard Programme has already been working on implementation of dashboard, and published a first set of data standards in December 2020. Voluntary onboarding of schemes and testing is expected in 2022, and the first dashboards are expected to be available with staged onboarding from 2023.
