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Four things you need to know about the Pension Schemes Act 2021

  • United Kingdom
  • ESG
  • Financial services and markets regulation
  • Pensions
  • Financial services

30-11-2021

The Pension Schemes Act 2021 (“PSA”) makes significant changes to how defined benefit (“DB”) pension schemes are regulated, with potentially considerable implications for the financial services sector, particularly private equity investors.

As part of its role to regulate defined benefit pension schemes, the UK Pensions Regulator (“TPR”) has a wide range of powers to intervene in the affairs of those it regulates. The PSA extends these powers further and we can expect that TPR’s new powers, which include the power to bring criminal prosecutions against lenders, investors and professional advisers, as well as compel such persons to attend meetings and inspect documents at their premises, are unlikely to lay unused on the statute book.

1. New criminal sanctions in respect of DB schemes are wide-reaching

The PSA introduced new criminal offences on 1 October 2021 which widened the class of those persons potentially liable to prosecution by the TPR to include lenders, investors and professional advisers.  Private equity investors are at greater risk of being caught within the scope of those liable to prosecution due to the nature of the investments they make.

The new offices include:

  • Risking accrued scheme benefits: it is an offence if a person does something that detrimentally affects in a material way the likelihood of accrued benefits under a defined benefit pension scheme being received.  The person need not have known it would have this effect – it’s enough if they ought to have known this and they have no reasonable excuse for their (in)action.
  • Avoiding an employer debt to a DB scheme: it is an offence if a person does something that prevents recovery of an employer debt due under section 75 of the Pension Act 1995, prevents such a debt from becoming due or compromises or reduces it.  The action must be intended to have this effect, alongside the person having no reasonable excuse for their (in)action.

The sanctions include unlimited fines and up to 7 years in prison, with an alternative civil sanction of up to £1 million.

See our client briefing, “The Pensions Regulator's criminal sanctions policy: a delicate balancing act”.

2. New powers for the Pensions Regulator mean additional considerations for corporate activity

When conducting investigations TPR can require people (including professional advisers) to attend interviews and can enter premises and inspect documents held there.

There are fixed penalties for non-compliance: £50,000 if someone does not comply and a £10,000 daily penalty for continued non-compliance. 

TPR can now issue contribution notices requiring those connected or associated with a sponsoring employer to make good a scheme deficit in two new circumstances: if a person has acted or failed to act in a way which:

  • materially reduced the amount of debt likely to be recovered by a defined benefit scheme (known as the employer insolvency test)
  • materially reduced the value of the resources of the employer relative to the amount of the estimated section 75 debt in respect of a defined benefit scheme

Companies, including investors and financial institutions, with DB schemes within their group could find themselves at risk of a contribution notice if their actions or failures to act satisfy either of these tests.

See our client briefing, “Update on notifiable events and other new Regulator powers in Pension Schemes Act 2021”.

3. New notification requirements to add to your governance processes

The notifiable events regime is designed to give TPR early warning of activity that could affect a DB scheme’s ability to pay members’ benefits in full when due.  New additions to the notifiable events regime come into force on 6 April 2022. 

The new “corporate transaction” notifiable events include:

  • a decision in principle to relinquish control of an employer
  • an offer to acquire control of the employer
  • a decision in principle to sell a material proportion of its business or assets
  • a decision in principle to grant or extend relevant security over its assets, where this would result in the creditor being ranked above the scheme in the order of priority

If a notifiable event occurs, an accompanying statement must be sent to TPR and the scheme trustees: failure to provide this is punishable by a fine of up to £1m.  In addition, providing false or misleading information is punishable by a fine or up to 2 years in prison.

4. Climate change should be on your pension scheme agenda

Pension schemes with assets of £1bn+ are now subject to the Taskforce on Climate-related Financial Disclosures regime and the related climate change governance, risk and reporting requirements.

Schemes must evaluate their current investments and whether those investments coincide with the strategy on combatting climate change.  Long term funding and objectives must be considered with climate change in mind.   In order to comply with their own requirements, investors are seeking commitments from the managers of the businesses in which they invest that they will provide the relevant data on ESG issues.

Schemes are likely to want to consider the sponsor’s approach and targets.  Engagement between trustees, sponsors and investment advisers will play a critical part in the ongoing process.  

See our client briefing “UK consultation on climate-related financial disclosures by asset managers, life insurers and FCA regulated pension providers”.

How can Eversheds Sutherland help?

The PSA will have wide-ranging implications for pension schemes, institutional investors, private equity funds and hedge funds. To find out more about how the PSA might affect your business, please get in touch.