What is coming up in 2020 for pension schemes? Here are 5 key issues which will affect you this year:
1. New criminal offences: could routine corporate activity be criminalised?
The Pension Schemes Bill creates new criminal offences which carry a fine or a prison sentence of up to seven years for acting in a way which reduces the chance of benefits being paid.
This could cover a huge range of ordinary acts or omissions, which could in future be criminal offences. For example:
- a lender taking security ahead of the pension scheme;
- trustees and employers agreeing on a funding plan where the contributions should be higher; and
- entering into a corporate transaction which leaves the scheme with a financially weaker employer.
Acts or omissions will not be criminal if a person had a "reasonable excuse", but reasonableness is open to interpretation and there's a risk of being judged with the benefit of hindsight after an employer has gone bust.
If you are involved in running a defined benefit pension scheme, can you justify your actions as reasonable?
2. Stronger Regulator powers and £1 million penalties
Other new measures in the Bill include:
- a new "before and after" test – the Regulator will be able to test whether an action has reduced the pension scheme's recovery from an employer in insolvency. If it has, the Regulator will be able to use its "moral hazard" powers to force payments into the scheme from people connected with the scheme employer. The Regulator will be able to apply these tests retrospectively once the Bill becomes law;
- a power to make regulations requiring some corporate transactions to be notified to the Regulator and scheme trustees in advance;
- a power for the Regulator to impose financial penalties of up to £1 million for breaches (including a failure to notify the Regulator of corporate transactions).
3. Scheme funding changes
Watch out for publication of the Pensions Regulator's consultation on a revised scheme funding code. This is likely to signal a change in the Regulator's approach, applying new stricter funding standards or undergoing more scrutiny from the Regulator.
In a separate but related development, the Pension Schemes Bill will require trustees to put in place a new funding and investment strategy setting out target funding levels and investment plans.
4. GMP equalisation
Hopefully 2 more pieces of the GMP jigsaw will fall into place this year. Firstly, HMRC will publish its guidance in the first quarter allowing schemes to finally take decisions about how they equalise GMPs. Then in the summer the Lloyds Bank further hearing will hopefully clarify what to do about members who have transferred out. Sponsoring employers should make sure scheme trustees liaise with them on equalisation plans. Although GMP equalisation can raise complex legal issues, the amounts at stake for individual members are often small, so employers should make sure that trustees are taking a proportionate approach to any issues.
5. High levels of buy-out activity
Buy-out volumes hit record levels in 2019 and this trend seems likely to continue into 2020. Stricter regulatory and funding regimes could provide an extra impetus for moving to buy-out, and the current relatively low value of the pound could make buying out the pension liabilities of UK subsidiaries an attractive option for overseas parent companies.