Pensions Alert: Pension Schemes Act 2021

On 11 February 2021 the Pension Schemes Bill, which was introduced to Parliament in January 2020, received Royal Assent, becoming the Pension Schemes Act 2021.

The Act covers a number of highly significant areas for pension schemes, containing provisions relating to DB scheme funding, the Pensions Regulator’s powers, pensions dashboards, governance and disclosure in relation to climate change risk, the statutory right to transfer and collective money purchase schemes. However, regulations to bring these provisions into force have not yet been made and further detail on many of the provisions will be set out in regulations and guidance. In this Pensions Alert, we provide an overview of the key issues covered by the Act and some of the upcoming developments expected in relation to them.

Scheme funding

The Act includes a new requirement for trustees of DB schemes to determine a “funding and investment strategy”, which is a strategy for ensuring that pensions and other benefits under the scheme can be provided over the long term. Trustees will have to prepare a written statement (called a statement of strategy) which sets out the scheme’s funding and investment strategy and a number of supplementary matters including the extent to which, in their opinion, the strategy is being successfully implemented and the main risks faced by the scheme in implementing the strategy. The funding and investment strategy will need to be agreed with the employer and the employer will also have to be consulted when the trustees are preparing or revising the supplementary information in the statement of strategy. The scheme’s technical provisions will have to be calculated in a way that is consistent with its funding and investment strategy.

The Act also sets out some other changes in relation to scheme funding including: (1) a requirement for trustees to send a copy of the actuarial valuation to the Regulator; and (2) a power for regulations to make provision as to the matters to be taken into account in determining whether a recovery plan is appropriate.

Regulations will set out further detail on the scheme funding provisions and the Pensions Regulator (Regulator) will also be introducing a new code of practice for DB funding. In March 2020, the Regulator published the first of two consultations on its revised DB funding code, which focused on the Regulator’s proposed approach, its principles and how these could be applied in practice. The consultation proposed a twin track compliance route to carrying out valuations – “Fast Track” and “Bespoke” – and stated that the Regulator expects certain overarching principles to apply to both approaches.

An issue which has been the subject of Parliamentary debate in relation to the Bill is the treatment of open schemes and whether the proposals on funding sufficiently recognise the different position of such schemes, compared to closed schemes. An amendment (which was not proposed by the government) was made to the Bill at Report Stage in the House of Lords which sought to ensure that, given their different liquidity profiles, open and active schemes that are receiving regular, significant cash contributions are treated differently to closed schemes. This amendment was subsequently removed from the Bill at Committee Stage in the House of Commons. However, the Minister for Pensions and Financial Inclusion commented that “… we are not proposing a one-size-fits-all regime that forces immature schemes with strong sponsors into an inappropriate de-risking journey. We have also made it clear that we will use secondary legislation to ensure that the requirement for all schemes to have a funding and investment strategy works appropriately for open schemes and ensures that immature open schemes are not prevented from taking appropriate investment risks where that is supportable”.

On 14 January 2021 the Regulator published an interim response to its first consultation on the DB funding code which, in relation to next steps, includes that the DWP’s consultation on draft regulations is currently expected in the first part of 2021, and the Regulator therefore anticipates publishing its second consultation, which will consider the draft code, in the second half of 2021.

The Regulator’s powers

Part 3 of the Act contains amendments to the Regulator’s existing powers and introduces new powers.

Contribution Notices

The Act introduces two new grounds for issuing a Contribution Notice (CN) (both of which are subject to a statutory defence).

• The “employer insolvency test” which would be met in relation to an act or failure to act if the Regulator is of the opinion that: immediately after the relevant time, the value of the scheme’s assets was less than the amount of its liabilities; and, if a section 75 debt had fallen due, the act or failure would have materially reduced the amount of the debt likely to be recovered by the scheme.
• The “employer resources test” which would be met in relation to an act or failure to act if the Regulator is of the opinion that: it reduced the value of the resources of the employer; and that reduction was a material reduction relative to the estimated section 75 debt.

The Act also makes some other changes in relation to CNs including: (1) adding to the list of matters that are potentially relevant to the reasonableness test; (2) changing the date as at which the shortfall sum (the whole or a specified part of which can be required by a CN) is calculated; and (3) introducing a new criminal offence of failing to comply with a CN without reasonable excuse.

Criminal offences

The Act introduces two new criminal offences which relate to DB schemes and which carry maximum penalties of seven years imprisonment or a fine or both.

• The offence of avoidance of employer debt would apply where a person: (1) does an act or engages in a course of conduct that prevents the recovery of the whole or any part of a section 75 debt, prevents such a debt becoming due, compromises or otherwise settles such a debt or reduces the amount of such a debt which would otherwise become due; (2) intended the act or course of conduct to have such an effect; and (3) did not have a reasonable excuse.
• The offence of conduct risking accrued scheme benefits would apply where a person: (1) does an act or engages in a course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits being received; (2) knew or ought to have known that the act or course of conduct would have that effect; and (3) did not have a reasonable excuse.

The criminal offences could potentially apply to a wide range of people involved with the scheme.

During the Parliamentary debates, concern was expressed about this wide scope. In relation to these concerns, at Committee Stage of the Bill, the Minister for Pensions and Financial Inclusion stated that it “is certainly not the intention to frustrate legitimate business activities where they are conducted in good faith”. He also noted that the provisions make it clear that “an offence is committed only if the person did not have a reasonable excuse for doing the act or engaging in the course of conduct”. He stated that what is reasonable will depend on the particular circumstances of the act, but the burden will be on the Regulator to prove that the excuse was not reasonable. The Regulator will be consulting on guidance on its approach to exercising these powers.

Notifiable events

The February 2019 response to the DWP’s 2018 consultation about the Regulator’s powers included information about changes to be made in relation to corporate transaction oversight, referring to the introduction of two new employer-related notifiable events and a requirement for a Declaration of Intent to be shared with the trustees and the Regulator in respect of certain transactions. The Act provides for a new duty on employers, and those connected or associated with them, to give notice to the Regulator in respect of certain events (and give a copy of that notice to the trustees), but the detail of this requirement is to be set out in regulations.

Information gathering powers

In relation to information gathering, the Act includes provisions which expand the Regulator’s interview and inspection powers. It also provides the Regulator with power to issue fixed and escalating civil penalties for non-compliance with these provisions or with a written notice issued under the Regulator’s existing powers requiring information to be provided.

Civil penalties

The Act provides the Regulator with a new power to impose a civil penalty of up to GBP1 million in certain circumstances. This power could be used instead of criminal proceedings in the case of failure to comply with a CN without reasonable excuse, avoidance of employer debt or conduct risking accrued scheme benefits. Other circumstances in which the new civil penalty of up to GBP1 million could be imposed are failure to comply with the notifiable events legislation and providing false or misleading information to the Regulator or to the trustees of a DB scheme in certain circumstances.

Timing

In January 2021 the Minister for Pensions and Financial Inclusion answered a written Parliamentary question about the powers, stating that the aim is for them to be available to the Regulator by autumn 2021. He also stated that: “None of the provisions in Part 3 of the Bill will be retrospective and the new criminal sanctions and information gathering powers will apply to all schemes where the act occurs, or in the case of a series of acts commences, after the powers come into force”.

Pensions dashboards

The Act also makes provision in relation to pensions dashboards, although much of the detail is to follow in regulations. Of particular note for trustees of occupational pension schemes is that the Act contains a power for regulations to be made imposing requirements on them to provide, or facilitate the provision of, “pensions information” by means of a dashboard. “Pensions information” will be prescribed in regulations but the Act states that it may include information as regards the position of an individual in relation to the scheme and certain scheme information. Other issues which regulations may cover in relation to the obligations on trustees include the manner and form in which the information must be provided, the time within which it must be provided and penalties for non-compliance.

In December 2020, the Pensions Dashboards Programme (PDP) published the first version of guidance on the data standards for pensions dashboards and is calling on schemes to “improve their data and get it in shape for their customers and members to access via dashboards”. An indicative timeline published by the PDP in October 2020 estimates that phase 4 of the development of pensions dashboards, which will be the phase in which schemes will begin to be compelled by law to connect to the dashboards ecosystem, will run from 2023.

Climate change risk

The Act will insert new provisions into the Pensions Act 1995 in relation to climate change risk, which contain powers to make regulations imposing requirements on trustees of occupational pension schemes of a prescribed description: (1) with a view to securing that there is effective governance of the scheme with respect to the effects of climate change; and (2) to publish information relating to the effects of climate change on the scheme. Following an August 2020 consultation on policy proposals in relation to these provisions, in January 2021 the DWP published a document setting out the response to that consultation and a consultation on draft regulations and statutory guidance.

Under the draft regulations, the first set of schemes to which the new requirements will apply are: (1) authorised master trusts and authorised collective money purchase schemes, irrespective of size; and (2) schemes which, on the first scheme year end date which falls on or after 1 March 2020, have relevant assets of GBP5 billion or more (with individual and bulk annuity contracts excluded from the value of assets for the purposes of this assessment). Trustees of these schemes will have to meet the governance requirements from 1 October 2021 or, if later, the date on which they obtain audited accounts in respect of the relevant scheme year. The governance requirements relate to issues such as: oversight of relevant climate-related risks and opportunities; identifying the climate-related risks and opportunities that the trustees consider will have an effect over the short, medium and long-term on the scheme’s investment strategy and, where applicable, funding strategy; scenario analysis; risk management; and metrics and targets. The draft regulations also impose new trustee knowledge and understanding requirements on these trustees in relation to climate-related risks and opportunities. Their first annual TCFD report will have to be produced and published within seven months of the end of the scheme year underway on 1 October 2021.

It is proposed that these requirements will apply one year later for schemes which have relevant assets of GBP1 billion or more on the first scheme year end date which falls on or after 1 March 2021. The DWP will begin an interim review of the requirements in the second half of 2023 which will enable it to assess how effective the regulations have been, allow identification of best practice, and will determine whether to extend the requirements to smaller schemes from late 2024 or early 2025, following consultation.

Statutory right to transfer

In August 2017 the DWP and HM Treasury published the government’s response to its December 2016 consultation on pension scams confirming that the government will proceed with its proposal to limit the statutory right to transfer. The Act enables regulations to be made prescribing additional conditions that must be met in order for there to be a statutory right to transfer. It states that these could include (but are not limited to) conditions about: (1) the member’s employment or place of residence; and (2) in prescribed cases, the member obtaining information or guidance from a prescribed person about exercising the option to transfer.

Correspondence between the Minister for Pensions and Financial Inclusion and the Chair of the Work and Pensions Committee about this clause has been published. The Chair of the Committee had proposed that the Bill be amended to add the results of due diligence undertaken by the trustees to the list of conditions in order that regulations could provide that there would not be a statutory right to transfer if certain “red flags” in relation to pension scams are present. This amendment was not made but the correspondence from the Minister states that the powers in the clause are sufficiently broad to enable the government to set out limitations to the statutory right to transfer in regulations relating to certain “red flags”. He also stated that the government intends to consult on the regulations. In a January 2021 evidence session, held as part of the Work and Pensions Committee’s inquiry on pension scams, the Minister stated that the regulations in relation to this clause will come into force “by probably about September or October”.

Collective money purchase schemes

Following the publication of the government’s March 2019 response to its November 2018 consultation confirming that it will be proceeding with its proposal to bring forward legislation to facilitate collective defined contribution (CDC) schemes, the Act establishes a framework for these schemes, which it defines as “collective money purchase schemes”. The framework includes that such schemes must be authorised by the Regulator in order to be able to operate and will have to meet certain criteria in order to become authorised, and also makes provision for ongoing supervision by the Regulator. The detail will be set out in regulations.

Conclusion

This is a significant Act for employers and trustees of occupational pension schemes, encompassing several areas of scheme governance. Where applicable, it will require action such as ensuring the approach to scheme funding is in line with the updated DB funding regime, understanding the extensions to the Regulator’s powers, preparing to disclose information via pensions dashboards, putting in place relevant governance processes in relation to climate change risk and updating transfer processes. Whilst some of the detail of the new requirements is not yet known as it will be in regulations and guidance, trustees should ensure that the relevant issues are now on their work plans for the coming year.