On 11 February 2021, the Pension Schemes Bill 2019 - 21 (the PSA 21) became law. The PSA 21 is an important and wide-ranging piece of pensions legislation that will have a material impact for employers that sponsor occupational pension schemes.
In this update, we set out the key points that will impact on scheme sponsors and provide links to our series of blog posts (with more information on each area).
We've also put together a one-side overview of the various elements that make up the PSA 21 and key issues for scheme sponsors.
A foundation for a new scheme funding regime
The PSA 21 sets out the legal foundation for a new scheme funding regime. There will not, however, be an immediate change in the statutory regime - this will follow in secondary legislation that we expect to be subject to consultation later this year. In addition, TPR is in the middle of consulting on changes to its code of practice on defined benefit scheme funding. It is expected that a draft of the new code of practice will be issued in the second half of this year with the whole regime to come into force in the first quarter of 2022.
Under the new regime, it is expected that trustees will need to:
- determine a funding and investment strategy for the scheme (something which was initially described in policy papers as the long term objective);
- have a written statement setting out their strategy; and
- submit a version of the statement signed by the chair of trustees to TPR.
What does this mean for scheme sponsors?
Although the new funding regime is not likely to be in place until 2022, the direction of travel is clear. Sponsors should consider:
- reviewing the new legal requirements that will apply to trustees of schemes they sponsor;
- proactively engaging with trustees so they can direct and shape the discussion on long-term funding and investment strategy; and
- the opportunities to engage with the trustees on risk transfer options.
More information
Read our blog post on the Pension Schemes Act 2021 and scheme funding.
The Pensions Regulator gains new powers
Under the PSA 21, The Pensions Regulator (TPR) will be given a range of new powers.
- TPR will have recourse to new criminal and civil penalties for breaches of pensions law (including three new criminal offences for the most serious breaches). With the maximum penalties set at seven years' imprisonment and/or unlimited fines, this is one area that has attracted a lot of attention;
- TPR will gain enhanced information gathering powers, including the right to require attendance at interviews;
- PSA 21 will introduce new notifiable events that are applicable with certain corporate transactions; and
- PSA 21 introduces two new tests allowing TPR to impose contribution notices.
What does this mean for scheme sponsors?
The most serious new criminal offences on avoidance of employer debt and conduct risking accrued benefits carry onerous penalties (up to seven years' imprisonment and/or an unlimited fine). Six of the new or revised offences carry civil penalties of up to £1 million.
Whilst the most punitive penalties will only apply to the most serious breaches of pensions law, they do signal a tightening of the regulatory regime. Scheme sponsors should be aware of these changes and also consider what actions they should take to mitigate risks in the event of regulatory action (e.g. careful documentation of decision making, early engagement with trustees etc.)
The new notifiable events on corporate transactions have the potential to be wide ranging and apply to a broad range of corporate activity (including a range of business as usual' activity such as dividends, intra-group loans and cash pooling). Scheme sponsors may need professional advice to determine if activity falls into the notifiable events regime and, if so, whether it actually has to be notified to the Pensions Regulator.
Sponsors should also be aware of the wider powers available for TPR to consider issuing contribution notices.
More information
Read our blog post on the Pension Schemes Act 2021 and increased regulatory powers.
New regime for statutory transfer requests
The PSA 21 gives the government the power to make regulations on statutory transfer requests. The PSA 2021 sets out that the regulations may include new requirements such as that the member:
- provides details and/or evidence of their employment and/or place of residence (e.g. payslips and utility bills); and
- obtains information or guidance about exercising their transfer rights from a prescribed person. Members will need to provide evidence to trustees that they have complied with this requirement.
Failure to meet the new statutory requirements upon requesting a transfer will mean that the statutory right to transfer is lost in respect of the request.
What does this mean for scheme sponsors?
Once the new regime is in place, it should mean a lower risk of scams and/or bad transfer decisions affecting employees. Sponsors should check that trustees are ready to put in place processes to comply with the new requirements.
More information
Read our blog post on the Pension Schemes Act 2021 and the statutory right to transfer.
New trustee duties to consider and report on climate change risk
Under the PSA 21, trustees of certain schemes will be required to make, report (and, subject to regulations, publish) disclosures on climate change risk in line with international standards. The detail of trustee duties is set out in regulations which are currently being consulted on. In addition, trustees will be able to refer to statutory guidance, a version of which has also been released for consultation.
What does this mean for scheme sponsors?
The new trustee duties will factor into:
- setting long term objectives under the new scheme funding regime;
- trustee approaches on scheme investments; and
- how trustees approach funding negotiations with scheme sponsors.
Sponsors may want to engage with trustees to encourage an alignment of approach on ESG issues.
More information
Read our blog post on the Pension Schemes Act 2021 and climate change risk.
A statutory framework for pensions dashboards
The PSA 21 sets out the legal framework for pensions dashboards. Pensions dashboards are a digital interface which allows an individual to see all their pension savings in one place. Specific duties on what trustees will need to do to ensure that their schemes comply with the new regime will follow in regulations and guidance. It is expected that trustees of large pension schemes will have to comply within two to four years (with the largest schemes having duties applied first).
What does this mean for scheme sponsors?
Trustees will not need to take immediate action on pension dashboards as the detailed duties will be set out in regulations and guidance. Trustees can, however, take useful initial steps to engage with the policy and understand what pension dashboards will mean for their schemes. One of the obvious areas to start is on scheme data. Trustees will need to ensure their data is accurate and of sufficient quality to be used for pensions dashboards. This may require Trustees to work on improving the data they currently hold.
More information
Read our blog post on the Pension Schemes Act 2021 and pension dashboards.
A statutory frame work for collective defined contribution
The PSA 21 sets out the legal framework for collective defined contribution (CDC) schemes. At this stage, CDC looks set to be used by Royal Mail as a solution to a long-running pensions issue. There is, however, the potential for CDC to have a wider role in the pensions landscape.
What does this mean for scheme sponsors?
Pension dashboards offer the chance to increase member engagement for pensions and increase the perceived value of pension provision as a benefit. In addition, schemes will need machine-readable and standardised data in order to comply. This may help to make de-risking activity easier.
More information
Read our blog post on the Pension Schemes Act 2021 and collective defined contribution.