The government has introduced long-awaited primary legislation dealing with pensions. The Pension Schemes Bill 2019-20 (the Bill) sets out a framework for collective defined contribution schemes, lays the foundations for pensions dashboards and proposes new powers for The Pension Regulator (TPR) and new trustee duties in relation to DB funding.
In the first of our series of insights on the Bill, we focus on the changes to TPR's powers and to the funding regime for defined benefit (DB) schemes. In relation to TPR, the Bill:
- creates two new grounds on which a contribution notice (CN) can be issued by TPR;
- introduces new criminal offences;
- provides for new non-criminal sanctions;
- gives TPR additional information-gathering powers; and
- revises the notifiable events framework provisions.
Proposals set out in the Bill also provide for new duties on trustees of DB pension schemes to determine a funding and investment strategy. The Bill states that this must then be set out in a written 'statement of strategy' signed by the chair.
Key points for trustees and employers
1. New primary legislation will give increased powers to TPR
The government has introduced legislation to Parliament that will enhance TPR's powers in areas such as moral hazard and information gathering.
2. There will be two new grounds for TPR to issue a contribution notice
The new 'employer insolvency test' and the 'employer resource test' will give TPR additional powers in situations such as those highlighted by the collapse of BHS and Carillion.
3. The legislation proposes harsher criminal and financial penalties
A raft of new offences will be punishable by unlimited fines and, in some cases, custodial sentences.
4. The defined benefit funding regime will be amended
Trustees will have new duties to determine a funding and investment strategy and to prepare a 'statement of strategy as soon as reasonably practicable after determining (or revising) their scheme's funding and investment strategy.
What does the Bill cover?
The Bill began its progress through Parliament when it was introduced in the House of Lords on 15 October 2019. As was widely anticipated in the pensions industry, the Bill focuses on:
- new powers for TPR;
- collective defined contribution schemes (CDC) (or, as the Bill defines them, 'collective money purchase schemes'); and
- pensions dashboards.
The Bill also covers some other areas of pensions policy, namely the DB funding regime, statutory transfers (CETVs), administration charges and changes to the Pension Protection Fund (PPF) compensation rules.
The Bill is also interesting for what it does not cover, most significantly:
- DB consolidators (also known as superfunds);
- TPR's powers to issue financial support directions; and
- easements in relation to the statutory process for the conversion of guaranteed minimum pensions (GMPs).
In the midst of political wrangling over the timing of Brexit or a general election, it is unclear when (or indeed if) the Bill will become law. The Bill does, however, have broad, cross-party support and so we can expect it to move forward, although of course there are likely to be changes to the detail before it becomes law.
What are the proposals relating to The Pensions Regulator in the Bill?
While the driver for most of the changes set out in this part of the Bill was to give TPR stronger powers to target unscrupulous directors and companies, the changes are likely to have an impact on the wider corporate community. Directors are likely to be more concerned about the risks involved in corporate activity involving DB schemes and TPR is likely to play harder in situations where it is involved in transactions or funding discussions.
Moral hazard framework - contribution notices
The Bill introduces two more tests for imposing a contribution notice (i.e. an order requiring a person to make a payment to a DB pension scheme):
- the employer insolvency test - essentially this will be met if TPR considers that at the time of an act or failure to act, a scheme was in deficit on a 'buy-out basis' and, had a section 75 debt fallen due, the act or failure to act in question "would have materially reduced the amount of the debt likely to be recovered by the scheme". A statutory defence will be available which will broadly depend on the reasonableness of the person's conclusions about the effect of the proposed act or failure to act and how they tried to mitigate any adverse effect.
- the employer resource test - essentially this will be met if TPR considers an act or failure to act "reduced the value of the resources of the employer" and the reduction was material relative to the amount of the estimated section 75 debt in relation to the scheme. Detailed regulations will need to follow to define what constitutes the "resources of the employer" and how they are to be valued. This could be very complicated, difficult to make workable in practice, and create uncertainty for companies. Again, a statutory defence will be available which will broadly depend on the reasonableness of the person's conclusions about the effect of the proposed act or failure to act and how they tried to mitigate any adverse effect on the employer's resources.
It is not immediately obvious how much wider these new tests might be in practice as compared to the existing bases on which TPR can issue a contribution notice, namely if the material detriment test is met or if there is an act or failure to act with a sole or main purpose of preventing the recovery in whole or in part of a section 75 debt.
New offences and financial penalties
Three new criminal offences are introduced, all of which will attract unlimited fines and in some cases, a prison term. The three criminal offences are:
- a failure to comply with a contribution notice without reasonable excuse - this offence will be punishable by an unlimited fine;
- avoiding an employer debt (also known as a section 75 debt) (i.e. where the person acts or engages in a course of action that prevents the recovery of the whole of or any part of an employer debt; prevents such a debt becoming due; compromises or otherwise settles such a debt; or reduces the amount of such debt, the person intended the act or course of action to have such an effect and the person does not have a reasonable excuse for the act or the course of action) - this offence will be punishable by an unlimited fine and/or up to seven years in prison; and
- conduct that risks accrued benefits (i.e. where a person acts or engages in a course of action that detrimentally affects in a material way the likelihood of accrued scheme benefits being received, provided the person knew or ought to have known that the act or course of conduct would have had that effect and they do not have a reasonable excuse for engaging in such conduct) - this offence will be punishable by an unlimited fine and/or up to seven years in prison.
Alternatively, TPR will have the power to impose a civil penalty (referred to in the Bill as a "financial penalty") in respect of any of these offences, up to £1 million.
TPR's information gathering powers and sanctions
The Bill revises some of the provisions relating to the notifiable events framework. The new financial penalties referred to above will apply to a person who fails to comply with the notifiable events duties (which are essentially to notify TPR of prescribed events or changes to those events) without reasonable excuse.
TPR's information-gathering powers have also been extended to include:
- a power to summon for interview relevant persons; and
- more far-reaching powers for TPR to inspect premises for the purpose, amongst other things, of investigating whether TPR has grounds for issuing a CN.
There are also new fixed penalty powers (up to a maximum of £50,000) and escalating penalty powers (up to a maximum daily rate of £10,000) where TPR establishes non-compliance with the existing provision-of-information requirements under the Pensions Act 2004 and also the new requirements to attend an interview or allow TPR to inspect premises.
In addition, where a person knowingly or recklessly provides TPR (or trustees in certain circumstances) with false or misleading information, they open themselves up to a civil penalty of up to £1 million.
What are the proposals relating to scheme funding in the Bill?
It is proposed that Part 3 of the Pensions Act 2004, which deals with the statutory scheme funding regime for DB schemes, will be amended as follows:
- Duty to determine funding and investment strategy - there will be a new duty on trustees of DB schemes to determine (and to keep under review and revise if necessary) a funding and investment strategy. This is defined as a strategy "for ensuring that pensions and other benefits under the scheme can be provided over the long term". This ties in with TPR's existing expectation for schemes to set long-term funding targets.
- Duty to prepare a statement of strategy - trustees will also need to prepare a written statement of their scheme's funding and investment strategy as soon as reasonably practicable after determining (or revising) their scheme's funding and investment strategy. This is referred to as a 'statement of strategy' and this will require consultation with the employer. The chair will need to sign it. It may be that this becomes the early incarnation of a wider DB chair's statement, which may evolve into covering other matters, for example on trustee board diversity.
What does the Bill mean for trustees and employers?
The changes introduced by the Bill are broadly what we were expecting following the Government's White Paper and various announcements from TPR itself.
The proposed changes are very much focused on strengthening the role and functions of TPR and making it a more proactive and effective regulator. That is very much evident from the particular emphasis on TPR's ability to obtain information and the significant penalties that can be imposed where required information is not provided.
The new powers and related sanctions reinforce the changing approach of TPR to the discharge of its statutory functions. The changes may cause most concern for sponsoring employers, who will likely see TPR leaning on its new powers alongside its existing ones as it seeks to influence outcomes in funding or transactional situations.
What happens next?
The Bill is scheduled to have its second reading in the House of Lords on Wednesday 30 October. Whilst the Bill generally is a relatively uncontroversial piece of legislation and is reported to have cross-party support, its passage will depend on getting sufficient parliamentary time amidst a raft of legislation presented in the Queen's Speech.
In addition, if Parliament is dissolved in advance of a general election, the Bill will fall and would have to be reintroduced by the new government. At this point, we can only wait and see but it would be disappointing, particularly for TPR, if the key elements of this Bill do not get progressed reasonably quickly.