Pension Schemes Act 2021: Increased Defined Benefit (DB) Pension Regulation

New pensions legislation tightens the regime supporting DB schemes. The Pension Schemes Act 2021 covers various items, in particular:

• New Regulator "moral hazard" powers
• New criminal offences for pension abuses
• Information gathering
• Transaction "Declarations of Intent"

This article provides an overview of these issues.

“Moral Hazard” powers

The Regulator already has powers to intervene in pensions-relevant corporate activity. However, recent cases (e.g. Bhs, Carillion) showed those powers are insufficient to counter scheme failures.

The Act, therefore, provides new Regulator powers to use (or threaten) - ie two grounds for issuing a Contribution Notice:

• the “employer insolvency test” – where an act materially reduces the resources available to meet scheme funding on insolvency; and
• the “employer resources test” – where an act reduces the resources meeting scheme funding (with the Regulator’s proposal being to compare “normal profits” from the last accounts against normal profits after an event, and with the Regulator deciding what is normal).

We await further guidance on what is "material", "resources" and what measure of scheme funding will trigger these tests.

New pensions crimes

The Act introduces pensions crimes, carrying a maximum seven years imprisonment and/or a fine:

• avoiding “employer debt” – ie intentional prevention of pensions debt recovery, without a reasonable excuse; and
• conduct risking accrued benefits – ie conduct causing a material detriment to benefits being received by members, without a reasonable excuse.

Concern has been raised that these new pensions crimes apply to a potentially wide range of people, with the Government and Regulator since stressing the offences won’t frustrate legitimate activity. It would be tried against the most obnoxious situations only, such as:

• sale of scheme employer without trustee involvement, resulting in loss of a parent guarantee;
• purchasing a scheme employer, failing to invest and extracting material value; and
• asset stripping.

New information-gathering powers

The Act expands existing interview and inspection powers. For example, the Regulator will be able to require attendance at the interview. It also provides the power to issue escalating civil penalties for non-compliance.

We will also see the introduction of two new employer-related “Notifiable Events” (that must be notified to the Regulator), being:

• sale of a scheme employer (shares or business/assets); and
• granting security ahead of the scheme.

"Declarations of Intent"

Of potential material impact on corporate activity and planning – but we await confirmation of the detail – is the new duty to notify the Regulator and Trustees in advance about corporate events. These Declarations could convert two-party deals into three- or four-party (with the Regulator and scheme trustees involved from an early stage).

We know Declarations will be required where the transaction is assessed (but ultimately by whom7) as having a high potential risk to a Defined Benefit scheme and then showing how the employer has considered (and, where appropriate, mitigated) that impact.We don’t yet know the conditions triggering a Declaration, nor from which date (later this year?) they will be required, nor the approach the Regulator will take to reviewing and acting on them.

Timing – when will all of this be in force?

The Government’s aim is for the new powers to be available this autumn. None are to have a retrospective effect (apparently). The primary legislation is in place, but the secondary details (consultations, regulations and Regulator materials) are trickling out and are expected throughout this year.

Note: the Act also covers: DB scheme funding (further changes); "Pensions dashboards" (member information per pension held); Climate change (governance obligations for very large schemes).