Global menu

Our global pages

Close

Speedbrief: The Pension Schemes Bill – was it worth the wait?

  • United Kingdom
  • Pensions

24-10-2019

Eighteen months ago, the Government published a white paper on protecting DB pension schemes.  This was followed by consultations on a variety of matters, including a stronger Pensions Regulator, the introduction of collective defined contribution schemes and pension dashboards.  However, it seemed that, for much of 2019, the industry was holding its breath waiting for the publication of a Pensions Bill to introduce the necessary legislation.

Now that one of the longest parliamentary sessions in history has come to an end with the recent (successful) prorogation, the Pension Schemes Bill 2019 has finally materialised.  So, was it worth the wait?

Well, there’s quite a lot in there.

New powers for the Pensions Regulator

As expected, there are significant new powers for the Pensions Regulator.  These include:

  • A new criminal offence of avoiding a section 75 debt which applies where the recovery of a debt is intentionally prevented, reduced or compromised without a reasonable excuse. The Regulator can also issue a fine of up to £1 million for such conduct.
  • A new criminal offence for conduct risking accrued benefits not being received where a person should have known their actions would have a materially detrimental effect on the likelihood of such benefits being received and there is no reasonable excuse for those actions. The Regulator can also issue a fine of up to £1 million for such conduct.
  • A new penalty of up to £1 million for failure to comply with the notifiable events regime.
  • A requirement for employers, and those connected or associated with them, to notify the Regulator of certain events (to be prescribed) as soon as reasonably practicable. The notice must set out the event, its potential detrimental impact and the steps taken to mitigate it. This is presumably intended to provide trustees and the Regulator with advance notice of certain corporate transactions, such as the sale of a material proportion of a sponsoring employer’s business or the granting of security over a debt to give it priority over the scheme.
  • Powers to require people (including professional advisers) to attend interviews.
  • An extension of premises liable to inspection to include places where documents are held that are relevant to the employer or transactions relating to the employer.
  • A penalty of up to £1 million for providing false or misleading information to the Regulator and, in certain circumstances, to trustees.

Contribution notices

The Regulator will be able to issue a contribution notice in two new circumstances:

  • where a scheme is not fully funded on a buy-out basis and an act or failure to act would have materially reduced the amount of any section 75 debt likely to be recovered had one become due immediately after such act or failure to act; or
  • where an act or failure to act has reduced the value of the resources of an employer by a material amount relative to the (notional) amount of that employer’s section 75 debt immediately after such act or failure to act.

Defences are available in both cases where parties can show that they took steps to mitigate any impact on the scheme’s ability to recover a section 75 debt or on the employer’s resources or if it would have been reasonable to conclude that there would be no material impact.

Before it can issue a contribution notice, the Regulator must conclude that it is reasonable to do so and, in the future, it will be able to take into account the effect of the act or failure to act on the assets or liabilities of the scheme and any failure to comply with the new duties to provide information to the Regulator.

The amount of a contribution notice will be determined by reference to the debt at the end of the scheme year before the Regulator issues its determination notice (specifying its intention to issue a contribution notice).  Under the current law, it is calculated by reference to when the relevant act or failure to act occurred, irrespective of the fact that the funding position may have changed considerably before any regulatory action is taken.

Funding

Trustees will be under a new statutory duty to have an investment and funding strategy to ensure that benefits can be provided over the long term.  More detail on what this strategy will need to include will be set out in regulations and the regulations will be able to require trustees to use specified actuarial assumptions or methods.

Trustees will need to have a written statement of their funding and investment strategy.  This must set out that strategy and explain whether it is being successfully implemented and, if not, what is being done to remedy that.  They will also need to set out “reflections of the trustees… on any significant decisions taken by them in the past that are relevant to the funding and investment strategy (including any lessons learned that have affected other decisions or may do so in the future)”.  The statement will need to be signed by the chair of trustees and, where there isn’t one, one will need to be appointed.

Actuarial valuations will need to be submitted to the Regulator as soon as possible after they are received by the trustees.

Finally, regulations may set out matters to be taken into account, or the principles to be followed, in determining whether a recovery plan is appropriate.  This may give schemes more certainty on how to construct recovery plans and should also make it easier for the Regulator to take action where a recovery plan does not meet required standards.

The Regulator had planned to start consultation on its revised DB funding code shortly after the Bill was published, but we understand that this has now been delayed until 2020.

Transfers

There are measures intended to prevent transfers to pension liberation vehicles.

Trustees will not be able to transfer benefits to another scheme where new conditions are not satisfied.  These are to be set out in regulations but are likely to relate (at least) to the nature of the member’s employment and where they live in relation to it.  The Government has suggested that they may also include requirements for a member to provide payslips and bank statements covering a three-month period to evidence that they have earnings at least equal to the national insurance lower earnings limit.

Once these requirements are finalised through regulations, trustees will have to revisit the due diligence they do on transfers to ensure that they are compliant.

Dashboard

Greater transparency around benefits is a key method of helping to ensure that individuals have adequate financial resources in retirement and one way in which the Government intends to achieve this is via the introduction of pension dashboards by reference to which people will be able to see the whole of their accrued pension entitlements from all schemes (occupational, personal and state) in one place.

The Bill sets out regulation-making powers in relation to such pension dashboards but contains no details about the dashboards themselves.  Regulations will be able to require dashboards to satisfy certain criteria and present information in certain ways.  There is also a power to require a scheme to provide information about the scheme itself and an individual’s benefits under it to the dashboard provider.

Collective money purchase (CMP) schemes

CMP schemes are, broadly, DC schemes from which benefits are provided out of scheme assets and can go up or down once in payment according to whether investments perform as expected.

The Bill will allow CMP schemes but only where they are used by single or connected employers.  Schemes will need to be authorised by the Pensions Regulator and the authorisation criteria will be similar to those that apply to master trusts with the additional requirement that the design of the scheme must be sound.  In determining this, the Pensions Regulator will consider a number of matters including a viability report from the trustees and a viability certificate signed by the scheme actuary.

CMP schemes will need to have rules which set out how the benefits will be determined and how they will be adjusted.  The trustees will need actuarial advice on setting the level of benefits and adjustments to benefits will need to be reported to the Regulator if they don’t take effect in accordance with the rules or the most recent actuarial valuation.

What next?

Although the Bill is long, it does not contain everything that the white paper discussed – there are no provisions on DB consolidation, extending auto-enrolment, facilitating GMP conversion or financial support directions.  In addition, a lot of the mechanics and details of the new provisions are left to regulations, so there is no clear or complete picture of how they will work and what the compliance burden on schemes and sponsors will be.

It is clear that, for DB schemes, there will be a significant new focus on long-term objectives and journey plans and the Regulator will be keeping a much closer eye on how corporate transactions might affect a scheme and its ability to ensure members receive their accrued benefits.

Both DB and DC schemes will need to provide information to dashboard providers and ensure that scheme data is in a format which means that is possible.  Transfer processes will also need to be changed to accommodate the enhanced due diligence that will be required.

In terms of whether the Bill was worth waiting for, it is hard to say.  A general election may be called in the near future and, whilst it seems likely that any new government would want to push forward these changes, it is far from clear how high up its legislative agenda they would be.  This means that it is difficult to gauge the impact of the Bill and what it will mean in practice, but hopefully more clarity will emerge in the coming weeks.

For more information contact

< Go back

Print Friendly and PDF
Subscribe to e-briefings