UK government to legislate for pension schemes

The Pension Schemes Bill will "help people plan for the future", as well as protecting pension savings, according to the government. It will include framework legislation supporting the introduction of collective defined contribution (CDC) schemes and online 'pensions dashboards', strengthen the powers of The Pensions Regulator (TPR) and, to help prevent scams, restrict the right to transfer pension savings from one scheme to another.

The bill was introduced to the House of Lords on 15 October. Its passage will depend on whether a majority of MPs in the House of Commons back the government's plans.

"This is a key milestone in the long journey towards making collective DC schemes a reality in the UK," said pensions expert Matthew de Ferrars of Pinsent Masons, the law firm behind Out-Law. "The question is when legislation will eventually allow a range of different types of CDC scheme. What is needed is a flexible regime which allows the development of CDC in different shapes and sizes, so it can be adopted by master trusts and decumulation products."

In the CDC pension model, employers and employees pay a fixed contribution but the pension risk is shared between all members of the scheme. This distinguishes it from the traditional DC model, in which the employee bears the full risk of their individual pension losing value. Scheme trustees set out a targeted level of member benefits, but this is not guaranteed, unlike in a defined benefit (DB) model.

Royal Mail and the Communication Workers Union have recently put forward plans for a CDC-style pension scheme for the Royal Mail workforce. The government consulted last year on plans to introduce legislation which would allow for the scheme proposed by Royal Mail, and similar schemes proposed by other employers in the future. The legal framework would initially only cover occupational trust-based schemes run by a single or associated employers, authorised by TPR and regulated on a modified version of the principles that currently apply to standard DC schemes.

Pensions dashboards will enable UK pension savers to access information from most schemes in a single place. The government first announced the project in 2016, as a way of helping people to make more informed decisions about their retirement and keep track of pension pots from previous employment. The first dashboard, to which schemes will initially supply information on a voluntary basis, will be hosted by the new single financial guidance body, the Money and Pensions Service.

The Pension Schemes Bill contains the legislative framework which will underpin pensions dashboards, including new powers to compel pension schemes to provide accurate information to dashboards. TPR will also be given powers to ensure relevant schemes comply.

Pensions expert Tom Barton of Pinsent Masons said that the project, which "already has a long history and some (stop/start) momentum behind it", was "another small step forward towards modern, digital access to pension savings and information".

"Fortunately, there's enough customer demand – employer and member – for digital solutions to mean that dashboard-like kit is already becoming a reality," he said.

"The legal framework will help to fill in a few important gaps – making sure that all schemes provide their data, and not just those with a keen commercial interest in the output. However the job, and the cost, of pulling together data and populating the dashboard will be no mean feat," he said.

The bill contains the basis for a suite of additional powers for TPR, as announced by the government earlier this year. They include new criminal offences of "conduct risking accrued scheme benefits", with a maximum sentence of seven years' imprisonment for the most serious breaches; and failure to comply with a contribution notice.

Pension disputes expert Isabel Nurse-Marsh of Pinsent Masons said: "The regulator's stronger powers and tough criminal sanctions are headline grabbing but it may be a while before the full impact of these changes is felt". 

"TPR will need to work on new guidance to make expectations clear and update its compliance and enforcement policies. As the regulator’s approach and its powers evolve, employers and schemes will need to make sure they keep up to date," she said.

The bill will also allow for regulations setting out the circumstances under which a pension scheme member will have the right to transfer their pension savings to another scheme; something that the government has acknowledged is necessary to prevent pension savers from being scammed.

Responding to its 2017 consultation on pension scams, the government said it intended to limit the statutory right to transfer pension savings to certain types of pension schemes: those operated by Financial Conduct Authority (FCA) authorised companies; authorised master trust schemes; and where a genuine employment link to a receiving occupational pension scheme can be evidenced. The government had been awaiting the roll-out of the master trust authorisation regime before legislating in this area.

Pension disputes expert Ben Fairhead of Pinsent Masons said that the changes "have been anticipated for some time", and warned that scammers' tactics were already evolving to take account of the anticipated changes. In addition, further consultation was likely to be required to establish what would count as a 'genuine employment link' for the purposes of the new regulations.

"There are now increasing concerns around certain transfers into personal pension schemes, as reflected in the Code of Good Practice," he said.

"The change to the law proposed by the government over two years ago would simply result in the statutory right being automatically established if a transfer is being made to a personal pension scheme operated by an FCA authorised firm. This could be addressed by giving trustees a general discretion to decide whether to allow a transfer, yet that is seen by some as controversial. Without a doubt though, the current state of the law is unsatisfactory, so change of some description is certainly needed and long overdue," he said.