The Pension Schemes Bill 2019-2021 now awaits Royal Assent after the House of Lords considered and agreed to the House of Common's amendments (discussed in our previous blog) on 19 January 2021. Although we are likely to see the Pension Schemes Act 2021 (the "Act") enacted in the coming months, we will have to wait for various regulations, guidance and codes of practice to be put in place before many of the operative provisions of the Act will come into effect. In this update, we highlight some key aspects of the Act which Trustees of DB schemes should be looking out for.
Changes to The Pensions Regulator's regulatory regime
What are the changes?
The Act will introduce three new criminal offences of 'avoidance of employer (s75) debt' and 'conduct risking accrued scheme benefits' (both of which have a penalty on conviction of an unlimited fine and/or imprisonment for up to 7 years), and 'failure to comply with a contribution notice' ("CN"), which could result in an unlimited fine. Alternatively, these offences could be dealt with by way of new civil penalty of up to £1 million introduced by the Act.
The new civil penalty will also be introduced for a range of other offences, including:
- Failure to comply with the notifiable events framework;
- Failure to comply with the requirement for a declaration of intent;
- Knowingly or recklessly providing false information to trustees; and
- Knowingly or recklessly providing false information to The Pensions Regulator ("TPR").
Changes will also be made to other aspects of TPR's regulatory regime, including an extension of the grounds on which TPR may issue a CN, amendments to the current notifiable events regime, extension of TPR's investigatory powers and new reporting requirements for sponsoring employers.
When will the changes come into effect?
The Government has indicated that the regulatory regime making the new powers available to TPR is expected to come into force by autumn 2021, with guidance from TPR expected to be consulted on in the coming months and published 'prior to commencement'.
The extension of TPR's enforcement powers has faced criticism. While they offer greater potential protection for DB scheme members, the concern is that these new criminal sanction powers could capture normal corporate business and transactions undertaken by anyone involved in the operation of a DB scheme. It remains to be seen what the impact of the changes will be although it seems likely that there will be an increase in the number of clearance applications to TPR going forwards and advisers will need to carefully consider the terms of the services they offer going forward.
In the meantime, Trustees should ensure that robust processes are in place to monitor business activity which may fall within the scope of the new regime. Appropriate advice should be taken as early as possible where there are concerns about the implications of the new regime and high standards of record keeping should be maintained, in case of intervention from TPR.
The Act will introduce statutory obligations on schemes to provide pension-related information to any qualifying dashboards. We await Regulations setting out the requisite information to be passed from pension schemes to the dashboards, however, the Pensions Dashboards Programme have recently published a 'Data standards usage guide' which sets out the proposed data elements and process. Although scheme onboarding is not set to begin until 2023, trustees should consider starting to prepare their data now, to ensure that they are ready when onboarding begins.
Scheme funding requirements
The Act will result in several changes to the existing scheme funding requirements contained in the Pensions Act 2004. Among other things, Trustees will have a duty to set out and review a written funding and investment strategy, which specifies the level of funding they intend to achieve and the investments they intend to hold over the long-term.
The new regime is expected to apply in full from 2022 onwards, with TPR currently consulting on a new scheme funding code of practice, which is expected in mid-2021 (TPR published an interim response to the first of two consultations at the beginning of January). Trustees should familiarise themselves with the new scheme funding code of practice when it is published and ensure they are able to comply with the new scheme funding requirements.
The Act provides for the limitation of statutory transfer rights, placing restrictions on the statutory right to a transfer in certain circumstances (to be set out in regulations), with the intention of reducing the number of transfers made to pension scams. With regulations to be consulted on in the coming months, we await the specific additional conditions. However, the transfer limitations will be a welcome addition for trustees, providing them with a greater ability to fully investigate and, if appropriate, block suspicious transfer requests, without facing the risk of legal action.
The Act will also include new regulation-making powers for the DWP in relation to climate change risk. The DWP have already been consulting on proposed regulations, which contain several mandatory governance and reporting requirements for trustees (for a full discussion of the DWP's consultation, see our previous blog). Trustees should monitor developments in relation to the proposed regulations and ensure that they comply with any regulations which come into effect following the outcome of the consultation.
If you have any queries about how the Pension Schemes Act 2021 will affect your scheme, please get in touch with your usual contact at Brodies.