After progressing through parliament for most of 2020, the Pension Schemes Bill is reaching the final stages of review before becoming law. The committee stage is due to end on 5 November, following which the Bill is expected to come into force by the end of the year.
Below, we have summarised the key changes which will be introduced by the Bill:
New criminal offences
The Bill introduces two new criminal offences relating to defined benefit occupational pension schemes, with both carrying a maximum seven year prison term and/or fine:
- Avoiding an employer debt without reasonable excuse – this occurs where the conduct intentionally and actually:
- prevents recovery of the whole or any part of the debt which is due from the employer under s75 of the Pensions Act 1995
- prevents such a debt becoming due
- compromises or otherwise settles such as debt, or
- reduces the amount of such a debt which would otherwise become due.
- Conduct that risks accrued scheme benefits – this occurs where a person commits an act or engages in a course of conduct that materially and detrimentally affects the likelihood of receiving accrued scheme benefits. Note that, for this to constitute a criminal offence the individual must have known or ought to have known that this would be the effect and have acted without reasonable excuse.
There has been (and continues to be) widespread criticism of the scope of the new offences, on the basis that the relevant provisions of the Bill extend beyond penalising improper conduct of sponsoring employers and could have far broader but unintentional consequences. At present, despite a robust debate in the House of Lords, none of the proposed amendments to the criminal offences provisions to limit the scope have been incorporated into the Bill.
Extension of the Pensions Regulator's powers
New powers for the Pensions Regulator to impose fines up to a maximum of £1million are also introduced under the Bill, applying to specified circumstances including (a) where an individual knowingly or recklessly provides false information to trustees or the Pensions Regulator, (b) any failure to comply with the notifiable events framework, and (c) any failure to provide a declaration of intent.
Changes relating to Contribution Notices
Two new grounds for issuing a Contribution Notice will be added to Section 38 of the Pensions Act 2004:
- The employer insolvency test – met where, in relation to the act or failure to act, the amount that could be recovered as an employer debt under Section 75 of the Pensions Act 1995 if the employer had become insolvent immediately after the relevant time would be materially reduced, as estimated by the Pensions Regulator. (This test only applies where the value of the assets of the scheme was less than the amount of the liabilities of the scheme immediately after the relevant time)
- The employer resources test – met if the Pensions Regulator takes the view that the act or failure to act would have reduced the value of the employer's resources, and that the reduction was material relative to the amount of the estimated section 75 debt in relation to the scheme. The Bill contains regulation-making powers to enable the Secretary of State to determine what constitutes the resources of the sponsoring employer and to prescribe the manner for determining, calculating and verifying the value of the employer's resources.
A statutory defence to these tests will be available if due consideration was given to the extent to which the act or failure to act might materially reduce the amount of the debt, and all reasonable steps were taken to eliminate or minimise the potential for the act or failure to have such an effect.
The application of the employer resources test may affect the ability of employers to make financial decisions in future, in particular the payment of dividends. Members of the House of Lords proposed amendments to address this issue, but the amendments were ultimately withdrawn following extensive debate.
Changes to the notifiable events framework and reporting requirements
New provisions inserted into the Pensions Act 2004 by the Bill will require employers to provide an "accompanying statement" – referred to as a "declaration of intent" in the white paper which preceded the Bill – about certain events notifiable by sponsoring employers of defined benefits occupational pension schemes. The list of events is to be set out in regulations, but the consultation documentation which preceded the Bill suggests that the following will be included:
- the sale of a controlling interest in a sponsoring employer (which is already a notifiable event under the existing regime)
- the sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of the scheme's liabilities
- the granting of security on a debt to give it priority over debt to the scheme.
The statement will be required to describe the event, any adverse effects on the scheme and the steps taken to mitigate them, as well as a description of any communication made to the Trustees.
Scheme Funding requirements
The Bill includes a range of revisions to the existing scheme funding requirements contained in the Pensions Act 2004:
- Trustees will have a duty to set out and review a funding and investment strategy over the long term. This must specify the level of funding that trustees intend to have achieved at specific points in time, as well as detail the investments that the trustees intend the scheme to hold at a date to be determined in accordance with the regulations
- Trustees will also be required to prepare a written statement of their scheme's funding and investment strategy (referred to as a "statement of strategy") as soon as reasonably practicable after determining or revising the strategy. The statement must cover:
- the extent to which, in the trustees' opinion, the funding and investment strategy is being successfully implemented and, where it is not, the steps they propose to take to remedy the position
- the main risks faced by the scheme in implementing the funding and investment strategy and how the trustees intend to mitigate or manage them
- reflections of the trustees or managers on any significant decisions taken by them in the past that are relevant to the funding and investment strategy (including any lessons learned that have affected other decisions or may do so in the future).
The sponsoring employer must be consulted in relation to the statement of strategy.
- The Pensions Regulator's supervisory powers will also be amended to reflect the new provisions, including powers for the Pensions Regulator to direct trustees to revise their scheme's funding and investment strategy in appropriate circumstances.
Alongside the changes contained in the Bill, the Pensions Regulator intends to publish a new scheme funding code of practice, which will require defined benefit scheme funding objectives to be set in a long-term context. A consultation on the detail of the new code is expected soon.
Other key elements of the Bill
- Collective Money Purchase Schemes. The Bill contains a permissive framework to establish and operate collective money purchase schemes within the UK, intended to introduce more flexibility in the options available for occupational pension provision. The framework includes an authorisation and supervision regime which is similar to the regime governing master trusts
- Pensions Dashboards. Following years of discussion about the introduction of pensions dashboards, allowing individuals to access information about all their pension savings in one place, the Bill introduces a statutory definition of a "pensions dashboard service" and a requirement for the Money and Pensions Service (MaPS) to establish a pensions dashboard service. Dashboards will initially be restricted to providing information only, before they can eventually be used for transactions, and (subject to any changes to the Bill before it is passed) commercially-run dashboards will be prohibited until the MaPS dashboard has been launched and run for at least a year.
Once introduced, new statutory obligations will also be placed on trustees of occupational pension schemes to provide information to the MaPS dashboard and any other qualifying dashboard.
- Transfer rights. The Bill will impose new restrictions on the circumstances in which members of an occupational or personal pension scheme may transfer their accrued rights to another scheme, with the intention of protecting members from pension transfer scams
- Climate Change Reporting. The Bill introduces a power to make new regulations requiring additional governance and disclosure relating to climate change risks. Corresponding powers to enforce any new duties will be given to the Pensions Regulator, including a power to issue financial penalties.
Please get in touch with your usual Womble Bond Dickinson pension team contact if you would like any further information on the Pension Schemes Bill.