On 1 October 2021, key provisions of the Pension Schemes Act 2021 (PSA 2021) come into force. Trustees and sponsors of occupational pension schemes will be under a new regulatory regime as The Pension Regulator's (TPR) powers are extended. In addition, trustees of certain schemes will need to comply with new requirements on climate change risk reporting and governance, and defined contribution value for member assessments.

PSA 2021 provisions at a glance Expected date to be in force
New grounds for TPR to issue a contribution notice - TPR will have two new grounds on which it can issue a contribution notice to require payments to pension schemes. 1 October 2021
New criminal offences and civil penalties - a broad range of new criminal and civil offences have been created under the PSA 2021. The most serious breaches (wilful or reckless behaviour, or a failure to act that adversely affects a Defined Benefit Scheme) could result in seven years' imprisonment and/or unlimited fines. 1 October 2021
New notifiable events regime - extending the scope of the notifiable events regime to cover relevant corporate transactions and to introduce penalties for non-compliance.
  • 1 October 2021 - penalty regime for non-compliance
  • 1 April 2022 - corporate transaction notifiable events
Broadening TPR's investigatory powers - TPR's information gathering and investigatory powers will be broadened under the PSA 2021. TPR will be able to summon relevant individuals for interviews and inspect a broader range of premises. This will be backed by new criminal sanctions and civil penalties. 1 October 2021
A new defined benefit (DB) funding regime - a new DB funding regime is expected to introduce tougher funding standards. This could see sponsors being required to increase their contributions. Late 2022 / early 2023
Introducing climate change risk reporting and governance requirements - new climate change governance and disclosure requirements for pension schemes will apply to the largest pension schemes first. 1 October 2021
New restrictions on the right to request a statutory transfer - these new restrictions will apply, requiring new prescribed conditions to be met. This is intended to add an extra layer of member protection against pension scams. Autumn 2021
New value for members' requirements - the trustees of certain smaller schemes will have to carry out a detailed assessment of how their scheme delivers value for members. 1 October 2021
Pensions dashboards - using a pensions dashboard, individuals will be able to view all of their pension information in a single place. To facilitate this, schemes will need to plug their scheme data into pensions dashboards using common data standards. April 2023 - 2026 (the requirements are being phased in and will affect the largest schemes first)
Collective defined contribution - the PSA 2021 introduces a new type of pension scheme. This will be a money purchase arrangement in which member and employer contributions are invested collectively.
  • Own-trust - early 2022
  • Multi-employer - 2023 onwards

This insight sets out the key points for trustees and for scheme sponsors, and then provides more detail on the key 1 October 2021 changes.

Key points for trustees

1. TPR will gain additional powers to regulate occupational pensions

From 1 October 2021, TPR's powers will be materially strengthened. A broad range of new criminal offences and civil penalties will come into force, enabling TPR to meet its aim of being 'clearer, quicker and tougher'. Powers in relation to sponsoring employers are broadened with:

  • new criminal offences for avoidance of an employer debt and conduct risking accrued scheme benefits; and
  • a new contribution notice regime.

In addition, TPR will be able to obtain more information via broader investigatory powers backed by criminal sanctions and financial penalties for non-compliance. Fines will also be introduced for failure to comply with the notifiable events regime.

More detail on TPR's additional powers is outlined in the section below on strengthening TPR's powers to regulate pension schemes. Our earlier article on the response to the consultation on strengthening the pension regulator's powers also provides further background.

2. Climate risk reporting and governance requirements will start to be introduced

New climate risk-related governance and reporting requirements will apply from 1 October 2021 to trustees of larger occupational pension schemes (i.e. those with assets of £5 billion and above, all master trusts and (when any are introduced) collective defined contribution (DC) schemes). The requirements will then apply to schemes with assets of £1 billion and above from 1 October 2022.

Further detail on TPR's additional powers is summarised in the section below on climate change risk reporting and governance requirements.

3. New value for members requirements will apply to certain Occupational Pension Schemes

On 1 October 2021, various provisions of the PSA 2021 relating to money purchase benefits will come into force. From the first scheme year that ends after 31 December 2021, the trustees of certain schemes will have to carry out a detailed assessment of how their scheme delivers value for members. The new requirements will apply to DC and hybrid (i.e. DB and DC) schemes that have:

  • total assets of less than £100 million; and
  • been operating for three or more years.

See our commentary below on new value for member requirements applying to certain occupational pension schemes for more insight.

Key action points for employers

1. New criminal offences and fines will apply in relation to sponsor activity

The PSA 2021 creates a broad range of new criminal offences and civil penalties. Two of the most significant extensions of TPR's powers include the creation of two new criminal offences:

  • avoidance of employer debt; and
  • conduct risking accrued scheme benefits.

The penalty on conviction of either offence includes an unlimited fine and/or imprisonment for up to seven years.

See point one under our section on strengthening TPR's powers to regulate pension schemes for more detail on the new criminal offences and civil penalties.

2. Two new grounds for TPR to issue a contribution notice will be introduced

From 1 October 2021, TPR will have two new grounds on which it can issue a section 38 contribution notice:

  • the employer resources test; and
  • the employer insolvency test.

A new criminal offence of failing to comply with a section 38 contribution notice will apply from 1 October 2021. In addition, a new financial penalty regime will apply for failures to comply.

More detail on the new contribution notice regime can be found under point two of our section on strengthening TPR's powers to regulate pension schemes.

3. TPR will gain broader investigatory powers

TPR will be granted a range of new powers and sanctions regarding its ability to:

  • collate and request information from regulated schemes and employers; and
  • punish those who fail to comply with its notices and directions.

Further details of TPR's new investigatory powers is provided below under point three of our section on strengthening TPR's powers to regulate pension schemes.

4. New penalties will apply for non-compliance with the notifiable events regime

A new notifiable events regime will be in place from 1 October 2021. From this date, TPR will have additional powers to ensure compliance with the existing notifiable events regime.

The notifiable events regime will also be extended in scope. Regulations placing new notification obligations on parties where certain corporate transactions involve DB pension schemes are expected to come into force on 6 April 2022.

To learn more about the new criminal offences and civil penalties applying for non-compliance with the notifiable events regime, see point four under the section about strengthening TPR's powers.

For more detail on the new notifiable events regime, read our insight 'Will your corporate activity be captured by the new pensions notification requirements?'.

In more detail

Strengthening TPR's powers to regulate pension schemes

Under the PSA 2021, TPR's powers to regulate occupational pension schemes will be materially strengthened. The new powers are intended to help TPR meet its aim of being 'clearer, quicker and tougher'. The PSA 2021 and underlying regulations provide the framework for a more interventionist style of regulation. TPR's new powers are grouped in four areas.

1. Criminal sanctions and financial penalties for avoidance of an employer debt and conduct risking accrued scheme benefits

The PSA 2021 creates a broad range of new criminal offences and civil penalties. Two of the most significant extensions of TPR's powers include the creation of two new criminal offences:

  • avoidance of employer debt; and
  • conduct risking accrued scheme benefits.

The penalty on conviction of either offence includes an unlimited fine, imprisonment for up to seven years or both.

TPR has issued a draft criminal sanctions policy which sets out how it intends to investigate and prosecute the new criminal offences contained in the PSA 2021. Most importantly for trustees are:

  • an explanation of TPR's view of the 'reasonable excuse' defence to the two new offences; and
  • examples of the factors TPR would consider significant in relation to decisions on prosecuting under the new offences.

A final version of this policy is expected to come into force on 1 October 2021.

2. New grounds for TPR to issue a contribution notice

TPR's contribution notice regime will be extended on 1 October 2021. From this date, TPR will have two new grounds on which it can issue a section 38 contribution notice:

  • the employer resources test; and
  • the employer insolvency test.

A new criminal offence of failing to comply with a section 38 contribution notice will apply from 1 October 2021. In addition, a new financial penalty regime will apply for failures to comply.

TPR has issued a draft update of its code of practice on contribution notices (Draft Code 12: Contribution Notices). Draft Code 12 sets out the circumstances in which TPR expects to issue a contribution notice when it believes that:

  • the material detriment test (which is one of the current grounds for TPR to issue a contribution notice);
  • the employer insolvency test; or
  • the employer resources test has been met.

In addition, TPR has issued a consultation response to its consultation on strengthening its powers (Strengthening The Pension Regulator's Powers: Contribution Notice and Information Gathering Powers Regulations 2021) which provides more context for the widening of its powers in relation to contribution notices.

3. Broader investigatory powers

TPR will be granted a range of new powers and sanctions regarding its ability to:

  • request and collate information from regulated schemes and employers; and
  • punish those who fail to comply with its notices and directions.

The new powers will come into effect on 1 October 2021 and include:

  • a power for TPR to summon certain individuals to attend an interview. This will apply to people to whom the current provision of information requirements apply;
  • a broader power to inspect premises, including premises where documents are kept or administration is carried out relating to an employer of a scheme;
  • a new fixed and escalating penalty fine regime for non-compliance with provision of information requirements; and
  • new penalties for knowingly or recklessly providing false or misleading information to either TPR or trustees / managers of schemes.

TPR has issued a consultation response to its consultation on strengthening its powers (Strengthening The Pension Regulator's Powers: Contribution Notice and Information Gathering Powers Regulations 2021), which provides more context for the widening of its investigatory powers.

4. Penalties for non-compliance with the notifiable events regime

A new notifiable events regime will be in place from 1 October 2021. From this date, TPR will have additional powers to ensure compliance with the existing notifiable events regime.

Knowingly or recklessly providing TPR with information under the notifiable events regime that is "false or misleading in a material particular" will be punishable by a fine or by imprisonment for up to two years.

More importantly for scheme sponsors, new notifiable events in relation to certain corporate transactions will be in place from 6 April 2022.

Notification of certain corporate activities to TPR

Under the new notifiable events regime, sponsoring employers will be required to notify TPR when a 'decision in principle' is made in relation to certain key corporate transactions. These include:

  • sale of a material portion of the sponsor's business or assets;
  • granting security over assets above a certain value; and
  • certain corporate restructuring (e.g. changes in who controls the sponsoring employer).

Notice and statement obligations for scheme employers

There will be a new duty on employers to give notices and statements to TPR that set out:

  • the implications for a DB scheme of certain corporate events; and
  • how any risks to the scheme will be mitigated.

The notice and statement will be required at a later point in a corporate transaction than the notifiable event notification. This will apply when:

  • there is greater certainty as to whether the transaction is going ahead;
  • the nature of the transaction; and
  • the implications of the transaction for the scheme.

For more detail on the new notifiable events regime, read our insight 'Will your corporate activity be captured by the new pensions notification requirements?'.

Climate change risk reporting and governance requirements

Who will the new legal requirements on climate change risk reporting and governance apply to?

The new requirements will be phased in. The first group to be subject to the new requirements are the trustees of the UK's largest pension schemes:

  • those with relevant assets of £5 billion or more;
  • master trusts; and
  • authorised collective money purchase schemes.

These schemes are required to comply from 1 October 2021. From 1 October 2022, the requirements will also apply to trustees of schemes with £1 billion or more in relevant assets.

What are the new legal requirements?

The new requirements include:

  • Governance - trustees will be required to establish and maintain oversight of climate-related risks and opportunities relevant to their scheme.
  • Strategy - trustees must, on an ongoing basis, identify and assess the impact of climate-related risks and opportunities which they consider will have an effect on the scheme's investment strategy and (where the scheme has one) its funding strategy.
  • Scenario analysis - trustees must, as far as they are able, undertake scenario analysis that assesses the impact climate change will have on:
    • the scheme's assets and liabilities; and
    • the resilience of the scheme's investment strategy and (where it has one) funding strategy.
    The scenario analysis should cover at least two global average temperature increase scenarios. One of these scenarios must correspond to a global average temperature rise of between 1.5°C and 2°C on pre-industrial levels.
  • Metrics and targets - trustees must select a minimum of three metrics for their scheme:
    • absolute emissions metric - giving the total greenhouse gas emissions of the scheme's assets;
    • emissions intensity metric - giving the total greenhouse gas emissions per unit of currency invested by the scheme; and
    • additional climate change metric - one other metric relating to climate change.
  • Trustee knowledge and understanding - trustees should have sufficient knowledge and understanding to enable them to meet their climate change governance requirements.
  • Reporting - trustees must publish a report which will cover how the trustees have complied with the requirements set out above. The report must be produced within seven months of the end of the relevant scheme year and must be published on a publicly available website and be accessible free of charge.

For more information, click here for the Government's consultation response 'Taking action on climate risk: improving governance and reporting by occupational pension schemes (July 2021)'.

TPR's draft guidance on governance and reporting of climate-related risks and opportunities

TPR has issued two documents in relation to climate risk reporting and governance:

It is expected that final versions of these documents will be issued shortly and come in to force on 1 October 2021.

The Draft Guidance

Areas covered by the Draft Guidance include:

  • Governance - trustees should add climate-related risks and opportunities to the remit and terms of reference of one or more sub-committee. They should also build climate change into service provider and adviser contracts.
  • Strategy - trustees should identify the short, medium and long-term time periods suitable for the scheme, considering the:
    • type of benefits payable;
    • membership profile;
    • period over which member payments will be made and how these might all develop and evolve.
    Trustees should also speak with the scheme's employer to find out how the employer assesses climate-related risks and opportunities over similar time periods.
  • Scenario analysis - trustees should determine when to conduct scenario analysis, carry out the analysis and document the resilience of the scheme.
  • Risk management - trustees should identify the climate-related risks and opportunities and assess their impact, developing a climate risk and opportunity dashboard to include in the regular reporting cycle. If there is a funding strategy the dashboard should include a section on funding and covenant.
  • Climate-related risks and opportunities - these should be included in scheme documentation. This might include updating the investment beliefs, including climate risks and opportunities in the risk register, and developing new policies and frameworks, if necessary. For example, there might be a dedicated set of climate principles or a climate-risk management framework.
  • Publishing a report - TPR gives practical guidance on how the report should be drafted and what it should contain.

The Draft Appendix

The Draft Appendix sets out the penalties that TPR anticipates applying in the event of a breach of the new duties.

TPR anticipates all schemes would receive the minimum penalty of £2,500 for a breach of the new duties. Any consecutive penalty will normally be at least £5,000 to reflect the seriousness with which TPR views repeated or ongoing breach of legal requirements. Where the scheme has a professional trustee in place, the minimum penalty will generally be £5,000 (as TPR expects higher standards from professional trustees).

In relation to discretionary penalties, the amount of the monetary penalty will generally depend on the persons concerned, band level and any aggravating or mitigating factors.

New value for members requirements applying to certain Occupational Pension Schemes

On 1 October 2021, various provisions of the PSA 2021 relating to money purchase benefits will come into force. The most onerous requirements will apply to relevant DC occupational pension schemes with under £100 million of assets and which have been operating for three or more years.

From the first scheme year that ends after 31 December 2021, the trustees of such schemes will have to carry out a detailed assessment of how their scheme delivers value for members.

Hybrid schemes (i.e. those that provide both DB and DC benefits) are also in scope, but only if total scheme assets are below £100 million. In such hybrid schemes, only the DC element will be subject to the requirement to carry out a value for members assessment.

A value for members assessment involves:

  • a comparison of reported costs and charges and fund performance against three other schemes; and
  • consideration of key governance and administration criteria.

Where the comparison does not demonstrate good value for members against the comparator schemes, trustees should consider winding up and transferring members to a scheme that does offer good value.

The value for members assessment must be recorded in the Chair's statement and published on a publically accessible website. The assessment also needs to be reported to TPR via the annual scheme return. Trustees concluding that the scheme does not offer value for members must state in the return whether they propose to transfer members to another scheme and wind up and if not, why not, as well as what improvements will be made in that event. A report to TPR in advance of the scheme return will also be required if the value for members assessment determines that the scheme does not provide value for members.

What's next for trustees and sponsors?

The PSA 2021 represents the biggest change to the regulation of occupational pension schemes since the Pensions Act 2004. Trustees and sponsors should:

  • ensure that they understand the scope of TPR's new powers. This may include training for trustees and key decision makers covering TPR's new powers and the broader range of criminal sanctions and financial penalties that will apply from 1 October 2021;
  • review governance processes to ensure that they reflect the requirements of the new regime. A robust governance framework will help trustees and sponsors to manage and mitigate risks of breaching the new regulatory regime;
  • take professional advice - the PSA 2021 marks a step change in the regulation of occupational pension schemes. With the prospect of tough criminal sanctions and financial penalties for non-compliance, sponsors and trustees should seek professional advice to help navigate the new regime;
  • maintain and, if necessary, improve the documentation and audit trail for decision making, including setting out the issues considered, the advice taken and the decision made. TPR has made it clear that it expects sponsors to back decisions in relation to material corporate transactions with necessary and relevant information. Such information will be in scope of TPR's investigatory powers; and
  • review and, where necessary, improve the channels of communication and the flow of information between scheme sponsors and trustees. Early engagement between trustees and sponsors has always been encouraged and will become even more important in respect of corporate activity that is within scope of the new regulatory regime.

To discuss any of the points raised in this article and see how we can advise your business in this area, please contact Ian Chapman-Curry in our Pensions team.