It has been a long and tortuous process, but the pension schemes bill has finally completed its passage through parliament and we just await the formality of Royal Assent before we have the Pension Schemes Act 2021 (the Act). Well done to Pensions Minister, Guy Opperman, for (almost) achieving his goal to pass this legislation in 2020 – not an easy task when parliament has been diverted by COVID-19 and Brexit.
I will start with a few comments on the most publicised aspects of the Act, i.e. the new powers given to The Pensions Regulator (TPR) to impose criminal penalties and fines, and anticipated requirements relating to notifications about corporate sales and debt security.
Lawyers like certainty, but the Act will be less than certain in a number of key areas. Much is left to TPR’s discretion. We all want the interests of scheme members to be protected and we all want criminal activity (or sharp practice) to be curtailed, but we do not want reasonable corporate activity to be stifled merely due to the presence of a defined benefit (DB) scheme within a corporate group. Common sense must be allowed to prevail. I urge all interested parties to engage with TPR’s consultations on how the new powers and obligations should be exercised to ensure that we have a workable and balanced regime.
Here are my thoughts on some specific points.
The Act will bring in two new offences in relation to DB schemes: avoidance of an employer debt, and conduct risking accrued scheme benefits. These carry the risk of a criminal penalty of an unlimited fine and/or imprisonment of up to seven years. Alternatively, TPR could issue a civil fine of up to £1 million. The new offences have a wide scope and extend to anyone involved in the operation of a DB scheme (e.g. from a trustee, corporate or advisory perspective) who does not have a reasonable excuse for their actions. Ignorance of the law is unlikely to be a reasonable excuse. TPR has said previously that it will not use these powers retrospectively but we would have had far more certainty if retrospection had been covered in the legislation. This is potentially the most controversial part of the Act. Trustees, corporates and advisers should check the extent to which personnel are indemnified or covered through insurance policies. Effective risk management systems and staff training are paramount.
The Act will introduce two new grounds for TPR to issue Contribution Notices in respect of an underfunded DB scheme. These are where the “employer insolvency test” or the “employer resources test” is met. The new tests are intended to ensure that corporate personnel actively consider the pension scheme if corporate activity (or inactivity) would make it less likely that any debt that becomes payable to the pension scheme would be paid. This is a very broad statement of the particulars, but corporates should examine the detail and ensure that key personnel are aware of the scope of this legislation. It should appear on corporate risk registers, with suitable analysis of triggers that would highlight the need for legal advice. Note that the Contribution Notice regime allows a six year look back period, so these new tests are effectively retrospective.
New Notifiable Events
The Act will allow for a new DB scheme notifiable events regime, and we await secondary legislation to provide a new structure for this. In particular, the government confirmed in its consultation that new “super” notifiable events would be introduced which must be notified to TPR and communicated to pension scheme trustees. The timeframes are to be confirmed but it is expected that notification will need to be made before a transaction completes. The anticipated new notifiable events include:
- Where there is the sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of the scheme’s liabilities
- The granting of priority security on a debt.
It is also likely that the sale of a controlling interest in a sponsoring employer (which is an existing notifiable event) will be elevated to “super” notifiable status. Schemes that do not have an information sharing protocol in place might wish to consider this.
Providing False or Misleading Information
A £1 million fine can be imposed where a person has knowingly or recklessly provided false or misleading information to TPR, for example via the scheme return or the notifiable events regime. The same level of fine can be imposed by TPR if false or misleading information is provided to the pension scheme trustees. It remains to be seen how these powers will be exercised in practice.
The Act will give TPR a more coherent set of investigative powers, making it easier to require trustees, employers, advisers or anyone else involved in running a pension scheme, to attend an interview. This should enable TPR to act faster when dealing with time-critical issues. It should also speed up routine investigations where face to face discussions could, in appropriate circumstances, be used instead of the more convoluted route of issuing section 72 information gathering notices.
The tightening of transfer legislation should be helpful in combatting pension scams when secondary legislation is passed. We expect that members will be required to evidence a genuine employment link if they wish to exercise their statutory right to take a cash equivalent transfer to another occupational scheme. This change to legislation is not a panacea – the war against the scammers will continue – but it is a useful obstacle. The pensions industry and regulators will need to continue their work to raise member awareness.
The Act will impose new duties on trustees of DB schemes to have in place a funding and investment strategy which must be kept under review. Employer agreement will be required. The strategy must specify the funding level which the trustees intend the scheme to have achieved and detail the investments the trustees intend the scheme to hold at specific dates. We await secondary legislation, but TPR has of course been proactive in consulting on its revised funding code of practice, engaging with the industry on the particulars of how it expects schemes to comply in practice. An interim response to the first of its two funding consultations was issued last week, and further consultation will follow.
The Act will pave the way for the development of pensions dashboards and the mandatory provision of data by pension schemes. Dashboards will offer the facility for members to see all of their pensions savings in one place, with a hope for improved member engagement as a result. The pensions industry has been criticised for lagging behind the banking sector in terms of financial technology – a lot of good work is being undertaken by the Pensions Dashboards Programme to counter this.
Collective Money Purchase
The inclusion of collective money purchase schemes in the Act appears to be largely to enable Royal Mail to fulfil its commitment to provide this form of pension provision for its employees. It will be interesting to see whether other schemes follow in its footsteps and whether collective money purchase develops as a decumulation vehicle for members seeking an alternative to annuity purchase.
This is a high level canter through a very important piece of legislation, having implications for pension scheme trustees, corporate sponsors, advisers and anyone else who is involved with the running of a pension scheme or the restructuring of an employer’s group of companies. I recommend that this appears on the agenda of every pension scheme and every corporate sponsor to ensure that key risks are identified and actions agreed and implemented.
Look out for our detailed communication on the Act which will be issued soon.