The Pension Schemes Bill 2019-20, announced in the Queen’s Speech in October, covers matters which have been on the horizon for some time such as the introduction of a framework for collective money purchase schemes, changes to scheme funding and additional powers for the Pensions Regulator.
Changes in relation to transfer rights and Pension Protection Fund compensation are also included, and the Pension Schemes Bill (the Bill) paves the way for pension dashboards. The proposed changes in each area are outlined below. With the general election scheduled for 12 December, the passage of the Bill through Parliament is now delayed.
Collective Money Purchase Schemes
The Department for Work & Pensions (DWP) previously consulted on the introduction of such schemes, following agreement between the Communication Workers Union and the Royal Mail that a collective money purchase scheme be put in place following closure of the Royal Mail’s existing pension scheme.
Collective money purchase schemes (CMPS) involve the sharing of risk between the employer and a member and have been seen by many as a viable alternative to defined benefit schemes, where all the risk falls on the employer and money purchase schemes, where all the risk falls on the member.
The Bill includes specific regulatory requirements including an authorisation regime which is very similar to the defined contribution master-trust regime.
Given the growth of defined contribution pensions and the regulatory requirements which will apply to collective money purchase schemes, it is unlikely that we will see a significant shift to collective money purchase being provided by employers. It is possible, however, that other large-scale employers may follow the Royal Mail’s line of thinking.
Amendments to scheme funding and investment legislation mean that in future, pension scheme trustees will need to determine a funding and investment strategy which will ensure that pensions and other benefits under the scheme can be provided over the long-term. In addition, a pension scheme’s technical provisions will be required to be calculated in a way which is consistent its long-term funding objective.
This follows the Government’s white paper on protecting defined benefit pension schemes and the Pensions Regulator’s 2019 funding statement, which set out expectations that schemes would adopt a long-term funding objective. The detail around the requirements will be set out in regulations. The Pensions Regulator’s Code of Practice on Scheme Funding is also expected to be updated.
Trustees will also be required to provide a statement of funding and investment strategy which also details the extent to which the strategy has been successfully implemented, together with details of the main risks, any mitigation of those risks, and reflection on any significant decisions taken by the trustees. Trustees will be required to consult the employer in relation to the main risks.
The document will be required to be signed by the Chair of Trustees. Although it has been described as a Chair’s Statement for money purchase schemes, it differs from the DC Chair’s Statement in that it is not intended to be a member-facing document. Instead it will be largely for the benefit of the Pensions Regulator, the trustees and the scheme employer.
The Pensions Regulator: clearer, quicker and tougher
The Bill introduces additional powers for The Pensions Regulator (tPR), following on from various high-profile corporate insolvencies such as BHS and Carillion.
This includes two new tests under which tPR can impose a contribution notice. In addition to the existing material detriment test, ‘employer insolvency’ and ‘employer resources’ tests are introduced. The employer insolvency test would be met where a pension scheme was in deficit and, had a Section 75 debt fallen due, the act or failure to act would have materially reduced the amount of the debt likely to be recovered. The employer resources test would be met where there is an act, or failure to act, which reduces the value of the employer and where the reduction is material relative to the Section 75 debt.
The Bill also introduces new criminal offences and makes changes to the penalties regime. Criminal offences being introduced are:
- Failure to comply with a contribution notice where tPR can require payment to be made direct into a scheme. This is punishable by an unlimited fine
- Avoidance of an employer debt. This is punishable by up to seven years in prison and/ or an unlimited fine
- Conduct risking accrued scheme benefits. This is punishable by up to seven years in prison and/or unlimited fines
Conduct which risks accrued scheme benefits is defined in the Bill as occurring where:
- an act or engagement in a course of conduct which detrimentally affects in a material way the likelihood of accrued scheme benefits being received (whether under the scheme or otherwise)
- the person knew or should have known that the course of their action would have had that effect
- the person engaging in the course of conduct did not have a reasonable excuse for doing so
As well as bolstering tPR’s existing information-gathering powers, a financial penalty for providing false or misleading information has been introduced. The penalties could potentially be as much as £1million. Additionally, where false or misleading information is provided to trustees then tPR can impose a penalty of up to £1million.
The explanatory notes to the Bill indicate that the notifiable events regime will be amended so that people who are involved in corporate transactions will be required to make a statement setting out information about the events and how any detriment to the pension scheme, as a result of the event, is to be mitigated. The Bill itself does not specify any amendments to the notifiable events regime other than in relation to penalties. We expect more detailed changes regarding notifiable events to be set out in the regulations.
Amendments to the Pension Scheme Act 1993 regarding a member’s rights to transfer are contained in the Bill. The aim is to try and help protect pension scheme members from pension scams.
This new limitation on transfers means that members of occupational or personal pension schemes cannot exercise their transfer rights unless the member provides information about their place of residence and information or evidence about their employment. The detail behind these new requirements will be set out in regulations.
Pension Protection Fund Compensation
In 2017 the High Court in Beaton v PPF held that a pension scheme member’s rights in a scheme to a certain type of fixed pension which had been transferred in from another scheme, were not attributable to pensionable service with an employer and so were not, therefore, aggregated for compensation cap purposes. This meant that pension scheme members would benefit from a potentially higher level of compensation than if the benefits were aggregated.
The DWP’s original proposal was to introduce amending legislation which would reverse the impact of the Beaton case so that benefits were aggregated. However, following the Hampshire v PPF case, in which the courts concluded that the individual level of protection for members had to be at least 50 per cent rather than an average, the DWP opted to reverse its original proposals and confirmed that the judgment in the Beaton case would stand.
We will need to wait and see whether a German case currently being considered by the Court of Justice of the European Union has any impact on the compensation levels required to be provided by pensions compensation systems. For the time being, the amendments in the Bill ensure that regulations confirming that benefits are not aggregated are deemed to have always had effect.
The Bill introduces a statutory definition of a pensions dashboard service, being ‘an electronic communication service by which information about pensions can be requested by and provided to an individual or a person authorised by the individual’. The intention is that the Money and Pensions Service will be the first dashboard provider but that commercial organisations will follow suit. In order to provide a dashboard service, certain regulatory requirements will need to be met.
The information a pensions dashboard will contain will include information about a member’s state pension, as well as any occupational and personal pension arrangements the member has in place. The intention behind the service is to make it easier for members to see all of their pension benefits in one location without having to approach each individual pension provider with whom they have a pension.
The Bill introduces statutory obligations on trustees of occupational pension schemes to provide pensions-related information to any qualifying pensions dashboard service. The regulations will set out details of what is required but a dashboard will cover information relating to a member’s benefits as well as the constitution, administration and financing of the pension scheme. A similar obligation will apply on personal and stakeholder schemes and compliance with this obligation will be enforced by tPR.
Earlier this year the DWP published its response to the consultation on pensions dashboards. Within that consultation it was envisaged that the disclosure obligations for schemes would be introduced on a staged basis, so that the first schemes having to provide such information will be large defined contribution schemes followed by smaller schemes and defined benefit schemes.