The Pension Schemes Bill (“Bill“) has completed all its parliamentary stages and its provisions are now final. A date for royal assent (the point at which it will become law) is still awaited.
The Bill will make important changes to the UK pensions landscape in a number of areas and will be relevant to sponsoring employers and trustees of both defined benefit (DB) and defined contribution (DC) schemes. Certain aspects of the Bill will have wider implications outside the day-to-day operation of pension schemes, such as the increased powers that will be given to the UK Pensions Regulator (“Regulator“), which include the introduction of new criminal penalties.
We are expecting further secondary legislation (setting out the detail for certain provisions) and consultations before key provisions of the Bill come into force, including in relation to the new Regulator powers. We will keep you updated on further developments. In the meantime, trustees and sponsoring employers should become familiar with the changes being made by the Bill. In particular, company directors and others involved in making business decisions for companies that sponsor DB pension schemes should also be aware of the particular implications for them.
The Bill will make changes across a wide range of areas. Key aspects that employers and trustees should be aware of are summarised below.
Measures to strengthen the Regulator
The Bill contains a number of measures that are intended to deliver on the Government’s commitment to tighten the rules to prevent scheme sponsors avoiding their DB pension obligations in the wake of corporate scandals such as BHS and Carillion and to support the Regulator in its “quicker, clearer, tougher” approach. We are not expecting these measures to come into force until autumn 2021. There are, however, some nuances to be aware of, particularly in relation to the new grounds for issuing contribution notices (a notice issued by the Regulator requiring a financial contribution to be made to a scheme).
- Regulator will be given greater oversight of corporate transactions:
- Companies will be required to notify transactions to the Regulator in a wider range of circumstances and at an earlier stage than at present. In addition, companies will be required to give a statement to the Regulator and trustees outlining the implications of certain transactions on the pension scheme.
- The legislation does not contains details of which transactions will trigger the new requirements. Based on previous statements by the Government, we are expecting two new notifiable events to be introduced: firstly, an asset sale (subject to certain thresholds) and, secondly, the granting of security over a debt so as to give it priority over any debt to the pension scheme.
- We will need to wait for further details about how the new regime will be implemented to fully assess the implications of the changes — further legislation setting out the details is expected between now and autumn 2021 — but we anticipate that this will be key area in practice, with the changes likely to encourage earlier engagement with pension scheme trustees.
- New criminal offences:
A number of new criminal offences will be introduced, which will add to the growing number of business crime offences on the statute books. Despite lobbying, the offences have remained unchanged through the Bill’s passage through Parliament.
- New criminal offences of conduct risking accrued DB benefits and avoiding an employer debt will be introduced. These new offences will carry a maximum seven-year imprisonment term and/or an unlimited fine.
- A further new criminal offence of failure to comply with a contribution notice will also be introduced. This will be punishable by an unlimited fine.
- Concerns have been expressed that the type of behaviour within the scope of the new offences — particularly the offence of conduct risking accrued benefits — is wide and could catch legitimate business activity.
- There is also a concern that the potential targets of the new offence of conduct risking accrued benefits is wide; it can, in principle, be committed by any person – not just companies (or their directors) with a direct link to the pension scheme through being in the same corporate group as a company that sponsors a UK DB scheme, as was the case with the previous Regulator powers.
- The Government has stated repeatedly that it is not its intention to deter legitimate business activity and that the key objective of the new offences is to provide a sufficient deterrent to individuals to make them “think twice” before putting DB savings at risk. It has also emphasised that it will not be possible for any of the new offences to be made out if the individual had a “reasonable excuse” for the behaviour in question.
- The legislation remains, however, on its face, extremely wide and we would expect the risk of potential criminal sanctions to give directors and others involved in transactions with DB schemes pause for thought, certainly until the new provisions have had time to bed in and for it to become clearer how the Regulator will approach prosecution of the new offences. A further consultation on this is expected between now and autumn 2021.
- Regulator will be given new grounds for issuing a contribution notice:
- The Bill will make a number of changes to the current (civil) contribution notice regime including the introduction of two new grounds on which the Regulator could issue a contribution notice: an employer insolvency test and an employer resources test.
- Further detail is awaited on the new tests, but, broadly, they will make it easier for the Regulator to issue a contribution notice in a broader range of circumstances than it can at present.
- New (civil) financial penalties and fines up to GBP 1 million:
- The Bill will introduce a new civil penalty regime for certain wrongdoing in relation to DB pension schemes. The Regulator will be given the power to impose civil financial penalties of up to GBP 1 million in certain cases, including where there has been a breach of the (extended) notifiable events requirements, where misleading information has been knowingly or recklessly provided to the Regulator or where misleading information has been provided to trustees. The Regulator would also have the power to impose the new civil penalties in the same circumstances as when the new criminal offences would apply.
- Trustees should note that the new civil penalties would apply to them in cases where they have breached any of their notifiable events duties or in cases where they had knowingly or recklessly provided misleading information to the Regulator.
- Enhancing the Regulator’s information gathering powers:
- The Bill will give the Regulator a suite of new powers to assist it with information gathering, including enhanced powers to require individuals to attend an interview and an extension of their current powers to inspect premises. The Bill also gives the Regulator the power to impose new civil sanctions for noncompliance with the information gathering requirements. Currently the sanctions are criminal and so this will give the Regulator an alternative enforcement tool.
Changes to the DB funding regime
The Bill will make a number of changes to the DB current funding regime.
- There will be a new requirement on trustees to have a scheme-specific funding and investment strategy “for ensuring that pension and other benefits under the scheme can be provided over the long term” and for the Statutory Funding Objective to be achieved in the context of this strategy. The Bill will require trustees to document this strategy in writing (referred to in the Bill as a “statement of strategy” but trailed previously as the DB chair’s statement) and report on how they are implementing it. Employer consent will be required (in most cases) to the determination of the strategy. The trustees will be required to submit the statement of strategy to the Regulator.
- Additional requirements on trustees to submit actuarial valuations to the Regulator will also be introduced.
- The Regulator will be given additional powers to impose an alternative funding and investment strategy.
Although much of the detail about how the new regime will operate in practice is still awaited (in the form of further secondary legislation as well as a new DB code of practice), trustees will already have started to consider how the overriding principles that will underpin the new regime, such as the requirement to set a funding and investment strategy, may impact their particular scheme. If they have not already done so, trustees should now start to consider the implications in conjunction with their scheme sponsor and advisers.
Tackling climate change: governance and disclosure
The Bill will introduce a high level legal framework allowing further secondary legislation to be passed imposing new governance and disclosure requirements on trustees in relation to climate change. The Government’s current proposals are that the regulations would require trustees to satisfy the 11 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and to report on how they have done so. In addition, statutory guidance would support schemes in achieving this and trustees would need to explain any divergence from that guidance in their reporting.
It is expected that schemes with assets in excess of GBP 5 billion, together with authorised master trusts and authorised collective money purchase schemes, will be required to have appropriate governance arrangements in place from October 2021 and to disclose against these requirements by the end of 2022. There would then be an intention to extend the requirements to schemes with more than GBP 1 billion assets by October 2022 with the potential application to smaller schemes to be reviewed in 2023.
The Bill will make changes to the current statutory transfer legislation, including the introduction of new restrictions to prevent transfers to pension scam vehicles being made. Further regulations are expected and this will be an important area for trustees to keep abreast of to ensure they are in a position to comply with the new requirements when they come into force.
Measures to support the development of pension dashboards
The Bill will put in place the legal framework to enable the development of pension dashboards. As in other key areas, much of the detail will be set out in regulations, which have not yet been published. Trustees should, however, be aware that they will, in due course, be required to provide scheme data to dashboard providers.
New framework for collective money purchase schemes
The Bill establishes a legislative and regulatory framework for the establishment of collective money purchase schemes. These are schemes where contributions into the scheme are pooled and invested with a view to delivering an aspired benefit level. Contributions into such schemes are fixed and the benefit level offered can only ever be a target or estimate, meaning the investment risk remains with the members rather than the employer but members are able to receive the benefit of having their investments pooled.
To date, there has not been a huge appetite for such schemes in the UK and it remains to be seen whether this legislation will result in employers and trustees exploring this as a benefit design option.