The Pension Schemes Bill received Royal Assent on 11 February 2021, becoming the Pension Schemes Act 2021. Originally introduced into Parliament in Autumn 2019, the Act covers a mix of pensions-related matters which we outline in this article.
Parts One and Two set out the legislative framework for establishing a collective money purchase scheme, commonly known as a collective defined contribution scheme (Part Two extends this to Northern Ireland). Collective money purchase schemes seek to spread the risks of defined contribution pensions across all members of the scheme while at the same time managing employer risk and costs. One of the reasons behind the introduction of this new framework is to enable the Royal Mail to press ahead with its proposals to move to the provision of pension benefits on a collective money purchase basis. The framework can be applied by any employer so it is an option which employers may wish to consider when moving away from defined benefit pensions for their workforce.
Part Three is designed to strengthen the powers of the Pensions Regulator, including the introduction of new criminal offences and higher financial penalties as well as making changes to the Pensions Regulator’s powers in its oversight of corporate transactions. Corporate activities which weren’t previously required to be notified to the Pensions Regulator will now fall within the scope of the notifiable events regime and notification is likely to be required early in any proposed transaction.
The additional Pensions Regulator powers in relation to corporate activity are potentially significant for scheme employers, and the criminal sanctions regimes are not limited in their application. They apply to ‘a person’ who engages in a course of conduct that detrimentally affects the likelihood of accrued scheme benefits being received, provided they knew or ought to have known that the act or course of conduct would have that effect and did not have a reasonable excuse for engaging in that conduct. Trustees are not exempt from the new criminal sanctions, but it is hoped that regulatory guidance will make it clear that normal trustee activity will not create any risk of falling foul of the new regime.
Part Four sets out the legislative framework for pensions dashboards, defining qualifying dashboard services and laying out the requirements that must be met by a potential dashboard provider. It also provides for the Money and Pension Service to oversee the development of the dashboard infrastructure.
Part Five amends the scheme funding regime for defined benefit (DB) schemes, requiring trustees to have a documented long-term funding target. Additionally, new restrictions on transfers between schemes are aimed at protecting members from pension scams. The Act also includes retrospective restoration of the policy regarding calculation of PPF compensation payments following the High Court’s judgment in Beaton v Board of the Pension Protection Fund  EWHC 2623 (Ch).
The changes to the scheme funding regime will apply across all DB pension schemes. The definition of ‘statutory funding objective’ is amended so that a scheme’s technical provisions are to be ‘calculated in a way that is consistent with the scheme’s funding and investment strategy, as set out in the scheme’s statement of strategy.’ This statement of strategy is commonly described as the DB ‘Chair’s statement’ although it is not intended to be a member-facing document.
The Pensions Regulator's consultation on a revised code of practice on scheme funding is underway but the precise timetable has yet to be confirmed. The consultation sets out the framework for a ‘fast track’ valuation process and a bespoke process. The fast track process will involve scheme trustees using a set of guidelines laid down by the Pensions Regulator. By contrast, the bespoke process may give trustees greater flexibility within the valuation process. However, it will require trustees to submit more supporting evidence with their valuation and is likely to result in the valuation being subject to greater scrutiny.
A notable change which was proposed earlier in 2020 and which has made its way into the Act is one which introduces new governance duties around climate change risk.
The Act introduces a new section (section 41A) into the Pensions Act 1995 which creates regulation-making powers for the Department for Work and Pensions (DWP) to impose requirements on the trustees or managers of occupational pension schemes with a view to securing that there is effective governance of the scheme with respect to the effects of climate change.
The government has indicated that it is not its intention to direct schemes or set their investment strategies, but that it was ‘absolutely necessary’ for trustees to act within their fiduciary duty to protect members' benefits against the risks posed by climate change.
The legislation provides for the introduction of regulations which impose obligations on trustees regarding:
- review of exposure of the scheme to risks of a prescribed description and assessing the assets of the scheme in a prescribed manner
- determining, reviewing and, if necessary, revising a strategy for managing the scheme’s exposure to such risks
- determining, reviewing and, if necessary, revising targets relating to the scheme’s exposure to such risks and measuring performance against those targets
The government is currently consulting on the content of new draft regulations and statutory guidance setting out the detailed requirements of this governance framework, which is due to come into force on 1 October 2021, although the timetable for compliance will vary depending on scheme size. Initially the governance and disclosure requirements will only apply to schemes with assets in excess of £5bn and then £1bn. The government consultation says that there will be a further consultation in 2024 before deciding whether to extend the regime to schemes with less than £1bn in assets.
Action you should be taking
The detail of the changes around scheme funding and investment, including those on climate change, will be contained in Regulations. It is therefore likely that there will be a period following Royal Assent before the detailed provisions come into force. A watching brief should be maintained so that scheme trustees can identify when specific regulatory changes will apply to their scheme.
The Pensions Regulator will be consulting on various matters associated with the Act, including the introduction of its new funding Code. Trustees may wish to speak to their scheme actuary on whether the fast track or bespoke approach to valuations is likely to be more suitable for their scheme.
For further information, please contact Suzanne Burrell or your usual pensions contact.
(A version of this article was first published by LexisNexis UK on 11 February 2021)