The Pension Schemes Bill 2019–2020, originally published on 16 October 2019, has been re-introduced (with some minor changes) by the Government following December's general election, and is currently progressing through Parliament.
With the retail and consumer sector having undergone a difficult 2019 – including reduced sales, rising costs and Brexit uncertainty – the changes proposed in the Bill will require further adaptation by employers during 2020 and onwards.
We take a look at some of the key points arising from the Bill and possible implications for pension plan trustees and employers in the retail and consumer sector.
Based on issues arising in the pensions world since the last Pensions Bill, the Work and Pensions Select Committee has called for changes in a number of areas over recent months.
Key action points raised by the Committee have included: a request for a "one-stop" pensions dashboard to allow savers to track their pension pots across multiple employers; a call for the regulation of the new "superfunds" before they can be allowed to hold pension savers' money; and urging the Government to introduce a suitable framework for collective defined contribution (CDC) plans, which provide some mitigation of the risks associated with being responsible for your own retirement savings.
The Bill goes some way towards meeting the demands of the Committee, although there are some notable gaps – in particular, the absence of any mention of superfunds and their regulation.
It also provides the Pensions Regulator with a variety of new powers to address perceived issues around defined benefit funding and scheme abandonment, which reflects the BHS debacle and other similar pensions disasters that have left the PPF to pick up the pieces of members' shattered retirement dreams.
The Bill provides for the introduction of pensions dashboards. These will allow people to view the pension savings in all their pension plans across their lifetime on one electronic platform. To facilitate their introduction, trustees will have a legal obligation to provide pensions-related information (which may include information about members' benefits and the constitution, administration and financing of the pension plan) to any 'qualifying' pensions dashboard service.
The Pensions Regulator will be granted new powers to enforce compliance with these new obligations.
Collective defined contribution plans
The Bill also provides a legislative framework for CDC plans, now referred to as "collective money purchase" (CMP) plans.
Contributions into a CMP plan by employers and employees are pooled and invested with a view to delivering an aspired benefit level; as contributions are fixed, the benefit level offered can only ever be a target or an estimate. Given that the level of benefit payable is not guaranteed by the employer, members need to recognise from the outset that the benefit levels aspired to may not be achieved and that the level at which pensions are paid may fluctuate.
However they do provide the benefits of scale, avoiding one of the key issues with defined contribution plans – what happens if an employee looks to retire when there is a downturn in the market? This could be popular with retailers who will be able to provide access to a scheme with this mitigation of risk (allowing employees to plan to leave the business at a certain date) without adding to their own risk as they have no funding obligation beyond paying any employer contributions in a similar way to an actual defined contribution scheme.
Under the Bill's provisions, the calculation of the value of CMP benefits will be based on an actuarial assessment of the plan's assets and the value of the members’ rights, and on whether adjustments are required to the rate or value of the benefit.
Similar to the current regime for master trusts, CMP plans will need to be authorised and supervised by the Pensions Regulator. Plans will need to submit regular supervisory returns and notify the Regulator about 'significant events' (which will be defined in regulations).
As a result of the ongoing issues around members being persuaded to transfer their pension savings to inappropriate or even fraudulent pension plans (as highlighted in our recent update), the Bill introduces additional due diligence checks to be undertaken by pension plan trustees before making a statutory transfer of a member's benefits. These checks relate to the member's employment and place of residence.
Defined benefit plans: long term funding strategy and trustee chair
Trustees of defined benefit (DB) pension plans will be under a new obligation to determine, and keep under review, a 'funding and investment strategy' to ensure that benefits under the plan can be provided over the long term.
As soon as reasonably practicable after determining or revising the strategy, and after consulting with the plan employer, trustees will be required to prepare a written statement of their plan's funding and investment strategy signed by the trustee chair (if there is no trustee chair, one will have to be appointed). The statement must be submitted to the Pensions Regulator. The Regulator will be granted powers to direct that trustees must revise their funding and investment strategy where it considers appropriate.
Trustees of DB pension plans will also need to send an actuarial valuation to the Regulator as soon as possible after they have received it.
Trustees and employers should note that the Regulator has delayed consulting on its revised DB funding code until early 2020.
The Regulator's stronger powers
The Bill's provisions will strengthen the hand of the Pensions Regulator significantly. The provisions are wide-ranging, encompassing new criminal offences and associated penalties, the extension of the 'moral hazard' regime and new powers to gather information from regulated pension plans and employers.
In the current climate, retail employers may well be looking at restructuring their business, and the proposed changes to the Regulator's powers will be a key consideration when deciding on a plan of action.
Moral hazard powers
The Bill provides the Regulator with two new grounds for issuing a Contribution Notice:
- the employer insolvency test – where a pension plan is in deficit and a person is party to an act, or failure to act, that would materially reduce the amount of the section 75 debt which is likely to be recovered by the pension plan should a section 75 debt fall due, and
- the employer resources test – where an act, or failure to act, reduces the employer's resources and that reduction is material relative to the amount of the pension plan's estimated section 75 debt.
The Bill also extends the 'notifiable events' regime. The detail will be in regulations which are expected to prescribe two new employer-related notifiable events which have to be reported to the Regulator:
- the sale of the business or assets of a sponsoring employer, and
- the granting of security on a debt to give it priority over debt to the pension plan.
When these events or the sale of a controlling interest in a sponsoring employer occur, corporate planners will have to make a declaration of intent, copied to the trustees, setting out information on the notifiable event and how any detriment to the pension plan will be mitigated.
Wider information-gathering powers
The Regulator's information-gathering powers will be widened to include a stand-alone interview power (not dependent on a notice previously having been issued) to require any employer, trustee, member or professional adviser to attend an interview in respect of any matter relevant to the exercise of any of the Regulator's functions.
The Regulator's power to inspect premises will also be strengthened to allow inspectors to enter any premises where documents or records are kept which are relevant to the exercise of any of the Regulator's functions.
New financial powers and penalties will allow:
- fixed penalties (up to £50,000) and escalating penalties (up to £10,000 per day) where the Regulator establishes non-compliance with the information requirements, and
- civil penalties for knowingly or recklessly providing false or misleading information to the Regulator or to DB plan trustees in specified circumstances (up to £1 million).
New criminal offences
The Bill creates three new criminal offences, the penalties for which include fines and imprisonment:
Failure to comply with a contribution notice
Conduct risking accrued plan benefits (in broad terms, an act which detrimentally affects in a material way the likelihood of a member receiving accrued plan benefits where the person knew, or should have known, that the act would have that effect and the person has no reasonable excuse)
Unlimited fine and/or up to 7 years' imprisonment
Avoiding a section 75 debt
Unlimited fine and/or up to 7 years' imprisonment
The Bill also gives the Regulator the power to impose civil penalties of up to £1 million for each of these offences (although a civil penalty will not apply if criminal proceedings are ongoing or if there has been a conviction).
Implications and next steps
The most significant changes in the Bill undoubtedly relate to the expansion of the Pensions Regulator's powers. These powers are wider than anticipated and could potentially restrict corporate transactions, particularly until it is clear how the Regulator will use these powers in practice.
It is also noteworthy that immediately before Parliament's dissolution in Autumn 2019, a private member's bill was introduced into the House of Lords that sought to impose a requirement to seek the permission of the Regulator and the trustees of any occupational pension plan before a dividend payment was made by a company. To date, no replacement Bill has been introduced.
Now that Frank Field is no longer chair of the Work and Pensions Committee following his defeat in the general election, it remains to be seen how the Committee's role will change under its new membership. It may well be that the Committee will take more of a back seat in dealing with pensions issues, leaving the Regulator to take charge to a greater extent.