Over a year since it appeared in Parliament, the Pension Schemes Act has received Royal Assent. The Act arms The Pensions Regulator (TPR) with sweeping civil and criminal powers; introduces new climate change reporting obligations on trustees; ushers in critical changes to the scheme funding and statutory transfer frameworks; and lays down a template for things to come in the shape of pension dashboards and collective DC arrangements. In this Law-Now, we summarise the main features of the Act.
Corporate transactions: be alert!
The Act creates the criminal offences of “avoidance of employer debt” and “conduct risking accrued scheme benefits”. These have already proved controversial: they are widely drawn and on their face could cover group restructurings, business sales, dividend payments and reduced employer support. They can also be committed by “any person”, giving rise to the prospect of catching employers, employees, trustees or advisers. TPR has said that it will consult on guidance on prosecuting the offences, which may be crucial in defining the scope of their operation. The changes are likely to take effect in autumn 2021.
New “declaration of intent” provisions will compel employers to tell TPR and the scheme trustees about specified events in advance. Consultation on regulations will follow but we expect these events to include the sale of a controlling interest in the employer, the sale of a specified proportion of the employer’s business or assets and the granting of security in priority to the scheme. Failure to notify could attract a penalty of up to £1m.
There are also enhancements to the contribution notice (CN) regime, which allows TPR to demand sums from parties connected or associated with a scheme employer. TPR can already issue CNs up to six years after an act (or failure to act) which causes material detriment to the scheme or prevents recovery of the full section 75 debt. It will now also be able to issue CNs where an act (or failure to act) materially reduces an employer’s resources, or materially reduces the likely recovery from an employer on insolvency. Failure to comply with a CN becomes a criminal offence.
A fresh approach to long-term funding
The Act requires trustees of DB schemes to have a formal “funding and investment strategy” for providing long-term benefits, to be described in a Chair’s statement and submitted to TPR. The statement must explain the risks the strategy could pose and how they will be mitigated, and the trustees’ assessment of how they implemented the strategy and any lessons learned. Schemes have to calculate liabilities consistently with the agreed strategy, and TPR will be able to intervene and potentially to direct that the strategy be revised.
Consultation on regulations will follow. In practice, the legislation in this area will dovetail with TPR’s ongoing DB funding consultations, and is unlikely to be in final form until the end of 2021 at the earliest.
Considering climate change risk
The most notable addition to the Bill during its parliamentary progress was a requirement on trustees to review and report on the impact of climate change risks and opportunities on their schemes. The Government began consulting on this last year, proposing that the largest schemes put in place a suite of governance measures, metrics and targets and report on these in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). A further consultation on regulations was issued only last month.
Helping trustees protect members from scams
The Act brings into play new powers, first promised in 2017, to crack down on pension scams. Regulations will give trustees tighter control over members’ statutory rights to insist on a transfer of benefits. In Parliament, the Pensions Minister committed to making the regulations wide enough to permit transferring scheme trustees (after undertaking appropriate due diligence) to refuse member requests to transfer in certain “red flag” situations. In addition, the Minister referred to criteria about safe destinations for transfers, and the taking of guidance by members. Again, consultation is promised, with the aim of changes by October 2021.
The Act equips TPR with stronger tools for eliciting information from those involved with administering pension schemes. There will be civil penalties of up to £1m for knowingly or recklessly providing false and misleading information to TPR, or to trustees. TPR will be able to enter premises to investigate whether it has grounds to use its moral hazard powers, and to inspect relevant employer documents. If TPR considers that any person holds information relevant to its functions, it may require them to attend an interview and it will be a criminal offence to unreasonably refuse.
Other developments on the horizon
The Act paves the way for big-picture pension reforms such as the authorisation and supervision of new collective DC schemes, and the establishment of pensions dashboards (to which occupational pension schemes will have to submit prescribed scheme information). There are hopes these initiatives can be rolled out over the next couple of years.
The Pensions Minister’s work is not done: he anticipates another Pensions Bill before the end of the current Parliamentary session, which would lay legislative foundations for regulating DB “superfund” consolidator vehicles. In principle, a future Bill could address other points the Government has previously hinted it would legislate for, such as Pension Protection Fund compensation levels, GMP conversion and changes to the jurisdiction of the Pensions Ombudsman.
Get ready for change
The Act is the most significant step in a process that began with the Government’s Green Paper at the start of 2017. It does not redraw the pensions landscape overnight: as suggested above, we expect a number of consultations on regulations and associated TPR materials before it is fully brought into force. However, the scene is now set. Trustees, employers and advisers should prepare for a busy 2021.
The CMS Pensions Team have produced a detailed Guide to the new Act: click here to access. For further information, please speak to your usual contact at CMS.