On 11 February 2021 the Pension Schemes Bill received Royal Assent, becoming the Pension Schemes Act 2021.
The Act covers many areas for pension schemes and is likely to have a significant impact. However, regulations and guidance are still awaited, both to bring many of the requirements into force and also to give more detail.
The following areas are covered in the Act.
Scheme funding
The Act introduces the requirement for all Defined Benefit pension schemes to have in place a long-term funding objective and a journey plan for how this will be achieved. Trustees will need to prepare a funding and investment strategy, agree it with the employer, and consult with the employer if any changes are made in the future. Funding and investment strategies will need to be aligned, and technical provisions calculated in a consistent way. The intention is that a scheme’s reliance on the employer covenant will reduce in the long term.
The trustees will need to set out in a written strategy:
- the funding level aimed for at certain future dates;
- the investments they intend to hold and how these may change in the future;
- the main risks the scheme will face.
The Pensions Regulator (TPR) has consulted on a new Code of Practice which will set out more detail on the new requirements. In particular, it intends to introduce a new twin-track approach to scheme funding supervision:
- “Fast Track” – where if the funding and investment strategy follow specific guidelines the regulation will be light-touch.
- “Bespoke” – where the trustees can depart from the guidelines but the scheme will be subject to more Regulator scrutiny.
The second consultation on the Code of Practice is due to take place later this year, with the new requirements likely to be in force for valuations with effective dates no sooner than the second half of 2022.
The Pension Regulator’s powers
The Act gives TPR more powers, including the power to impose a prison term of up to seven years and/or an unlimited fine. There are four new criminal offences:
- avoidance of employer debt;
- conduct risking member’s accrued benefits;
- giving TPR incorrect information about a notifiable event;
- failure to comply with a contribution notice.
These offences could apply to many different people connected with a scheme, and apply where people took action that they should have known would have a detrimental effect, and had no reasonable excuse for doing so.
Contribution notices
The Act introduces two new tests for situations where Contribution Notices can be issued:
- “employer insolvency test” – an event reduces the likelihood of an employer debt being recoverable;
- “employer resources test” – an event reduces an employer’s resources that are available to pay a potential employer debt.
Climate change considerations
The Act will require trustees to consider the risks of climate change from a governance point of view, and to publish information concerning the effects that climate change could have on the scheme.
Pensions dashboards
The Act progresses pensions dashboards, whereby information is gathered in one place for individuals to be able to see their private and State pension provision in a consolidated format. Trustees and providers will be required to supply information regarding individuals’ benefits for this purpose.
Collective defined contribution schemes
The Act gives the go-ahead for these schemes, also known as collective money purchase schemes, to be set up. These will be authorised by TPR and regulations will set out what criteria they have to meet and how they will be supervised going forward.
Statutory right to transfer
Currently it is very difficult for trustees to stop cash equivalent transfers going ahead even when they fear a member is being scammed, and concerns over pension scams have been growing. The Act aims to tighten the rules for transfers in order to help guard against this.
If you require any further information, please get in touch with your usual Quantum Advisory contact.
26 February 2021