The Pension Schemes Act 2021 (The Act) received Royal Assent on 11th February 2021, setting the agenda for legislation for the next few years.
Its content will profoundly shape the future of pensions by pushing forward the core elements of the Government’s policy for pensions. The Act is a skeleton framework and the detail will need to be developed in regulations and policy guidance.
It’s now crucial that employers and trustees recognise the proposed changes so that they can actively engage with these developments while there’s still time to properly prepare for them.
Pensions dashboards
The Act provides the framework structure to support the introduction and development of online pensions dashboards. Notably, regulations within it force pension scheme trustees and providers to provide data on demand via dashboards.
The requirements for schemes to link in with the dashboards and provide standardised benefit information will pose a serious challenge for some schemes as this can only be achieved with high quality data supported by modern pensions administration systems.
The Government aims to consult on proposed regulations for pensions dashboards later this year and lay draft regulations before Parliament for debate in 2022. Delivery is described as ‘on track’ and staged onboarding is expected to start from 2023, so starting a project now could prove to be prudent.
Criminal offences and The Pensions Regulator’s powers
A key driver for part of the Act’s provisions were the controversial corporate collapses of firms such as Carillion and British Home Stores at the end of the last decade.
The Act seeks to create a stronger and more comprehensive sanctions regime, tightening the rules to prevent abuse. It includes the creation of new criminal offences for intentionally avoiding employer debt to any defined benefit (DB) scheme or intentional behaviour risking accrued scheme benefits without reasonable excuse. Those found guilty could face up to seven years in prison or an unlimited fine or both.
The Regulator has been consulting on a draft policy setting out its approach to investigating and prosecuting the new criminal offences.
There are also changes to the existing contribution notice regime with the introduction of employer insolvency and resources tests. Draft regulations that define these matters more closely are currently being consulted on and the intention is for the new regime to be in place for autumn 2021.
The Regulator will have new information-gathering powers and tougher oversight of corporate transactions. Certain people involved in corporate transactions will have to make statements setting out information about those matters and how any detriment to the DB pension scheme is to be mitigated. These will be consulted on later in the year with commencement “as soon as practical thereafter”.
DB scheme funding
The scheme funding provisions within the Act require DB scheme trustees to:
A consultation on draft regulations will be published later this year, following engagement with key interested parties. This will go alongside a full public consultation on revisions to the Regulator’s Funding Code.
Changes to the statutory transfer rules
A significant change made by the Act is the amendment of existing legislation on members’ rights to transfer their pensions. Regulations can be made to stipulate the destinations and circumstances under which a member will be able to transfer, including the conditions to be met first. The intention is to limit members transferring into pension scams.
A consultation on the regulations setting out the conditions is expected in early summer 2021 and they are expected to come into force in early autumn. Where the conditions are not satisfied, trustees can refuse to action the transfer. The challenge will be getting the detail right, especially as scammers are constantly changing their tactics.
Climate change risk
The major amendment to the Act during its Parliamentary progress was the introduction of new duties on trustees to address climate change risks in their scheme governance. For schemes affected, this will involve trustees establishing and maintaining oversight and governance processes with adequate steps for identifying, assessing and managing climate change-related risks and opportunities relevant to the scheme.
We address this subject in more detail later in this edition of Compass.
Miscellaneous changes
Collective defined contribution schemes
The Act provides the legislative framework to establish and operate the new class of collective money purchase schemes. These operate around fixed contributions that are pooled and invested to deliver a target benefit level. Draft regulations are expected to be consulted on in early summer 2021.
Amendments to the Pension Protection Fund (PPF) compensation rules
The Act ensures that a fixed pension (often derived from a transfer-in) and any other pensionable service within the scheme should be added together for the purposes of calculating PPF compensation, including applying the compensation cap.
Administration charges
The definition of an administration charge has been updated to make it clearer which types of charge are in scope of the overarching definition. The administration charge definition is relevant to the charge caps that apply to schemes used for automatic enrolment and stakeholder schemes.
Capita comment
The Act includes several frameworks in which further regulations will be consulted on to clarify the details before changes are actually made. We will be monitoring these closely but, where relevant, trustees and employers may want to keep these subjects on their agenda to ensure that they are kept up to speed, especially as there are likely to be many changes this year.
A key concern for employers and trustees dealing with DB schemes, and those advising them, is the new sanctions regime. The Regulator has indicated that the new offences are only aimed at enabling it to address more serious intentional or reckless conduct. Several concerns were raised about the breadth of the powers when the legislation was going through Parliament. The Government’s response was that these concerns would be addressed in the Regulator’s policy and guidance. However, its recent consultation has stuck very closely to the legislation as drafted and so the wide scope of the powers remains a concern. For example, will prosecutions be pursued as a deterrent? (It’s argued that the decision to prosecute should be based on the merits of the case alone.)
Please speak to your usual Capita contact if you need further information.