Scope of the Pension Schemes Bill
The Pension Schemes Bill (the Bill) was introduced into the House of Commons on 1 July 2020, and is now expected to proceed to the report stage and a third reading on 16 November.
Most notably under the Bill:
- Measures will come into force that will substantially strengthen the Pensions Regulator's powers. These include a new criminal offence for anyone engaging in conduct that detrimentally affects, in a material way, the likelihood of accrued scheme benefits being received. As a result, companies engaging in corporate transactions, a reorganisation or refinancing will face greater burdens in ensuring compliance; and
- Defined benefit schemes will be required to have a funding strategy in place for ensuring benefits can be provided over the long term and to have an investment strategy to support this objective.
Despite an anticipated delay, the Pensions Minister, Guy Opperman, has stated that he is confident that the Bill will be law by the end of the year. Overall, these new measures will mean greater protection for pension schemes, particularly in ensuring that they are better supported on a company sale, a reorganisation or financing, but will place greater obligations on companies sponsoring defined benefit schemes (and the trustee of those schemes) in ensuring compliance with the new requirements.
1. Strengthening the Pensions Regulator's powers
Contribution Notice: Two new tests will be introduced for imposing a Contribution Notice (i.e. a notice requiring a person, such as another group company or a company director, to make a payment of a specified sum into a defined benefit scheme if the Pensions Regulator considers it reasonable to do so):
- the "employer insolvency test" – this will be met if, in relation to an act or omission, the Pensions Regulator is of the opinion that the scheme was in deficit on a "buy-out basis" and, if a "Section 75 debt" had fallen due1, the act or failure to act in question "would have materially reduced the amount of the [Section 75] debt likely to be recovered by the scheme
- the "employer resource test" – this will be met if, in relation to an act or omission, the Pensions Regulator is of the opinion that the act/omission "reduced the value of the resources of the employer" and the reduction was material relative to the amount of the estimated Section 75 debt in relation to the scheme.
A statutory defence is available under either test. The new tests could potentially catch the following corporate activity:
- payment of a dividend;
- sale of a business;
- granting security to a lender; and
- intra-group transfers.
Much will depend on how the Pensions Regulator applies the "material reduction" tests in either case. It is hoped that the Pensions Regulator will issue guidance on the exercise of its new powers in due course.
Criminal offences/financial penalties: The Pensions Regulator's powers will be bolstered with three new criminal offences available to it and a civil sanctions regime, including the power to issue penalties of up to £1 million. Those that risk members' accrued scheme benefits, or avoid a Section 75 debt, could face up to seven years in prison and/or an unlimited fine.
Information and interviewing powers: The Pensions Regulator will also now be able to summon certain persons for an interview and will have greater powers to inspect premises when considering grounds for issuing a Contribution Notice.
2. New funding scheme requirements
The Bill introduces a new requirement for defined benefit schemes to have a "funding and investment strategy" to ensure benefits can be provided over the longer term. Trustees will be required to produce a funding and investment strategy to support this long-term objective, specifying which investments the trustees intend to hold, and the intended funding levels.
Scheme trustees will need to report on its implementation to the Pensions Regulator in a new "statement of strategy". The Pensions Regulator will have powers requiring trustees to revise their funding and investment strategy.
The obligations on scheme trustees are likely to increase as a result of these requirements (as the scheme's funding and investment strategy have to be agreed with the employer, and trustees must consult with the employer on the written statement of the strategy).
3. Collective Defined Contribution schemes
The Bill also provides a framework for the operation and regulation of collective defined contribution (CDC) pension schemes. Under the existing UK workplace pensions framework, employers offer either:
- Defined Benefit (DB) schemes, which provide pension benefits based on salary and length of service; or
- Defined Contribution (DC) schemes, where individuals build up a pot of money to provide an income at retirement.
Unlike DB schemes, which promise a specific income, DC incomes depend on factors such as the amount paid in, investment returns and decisions made at retirement. These two models place all the risks and associated costs – economic, financial and longevity – with either the sponsoring employer (for DB schemes) or the individual member (for DC schemes).
The government believes that creating a third option called Collective Money Purchase Schemes (CMPS) – where risks would be entirely with the members but shared between them collectively – could be beneficial to sponsoring businesses and individuals in certain cases. Ultimately, under a CMPS both the employer and employee would contribute to a collective fund from which the employee would then draw an income at retirement.
4. Pensions dashboards
In line with its far-reaching approach and building on previous discussions, the Bill also provides for a pioneering new dashboard system offering an online service that allows people to view all their pension information in a single place.
The aim is to aid people's retirement planning by allowing them to view their information on a consolidated platform and, as a result, the proposal has generally been welcomed by the pensions industry. The idea is to provide consumers with simple, impartial and trustworthy information. However, it is still unclear exactly when schemes will be required to provide information to the new dashboard provider(s) and how onerous the requirements will be. There may be significant cost implications for schemes in meeting these new requirements.
- An employer participating in a defined benefit occupational pension scheme may owe an employer debt to the scheme's trustees under Section 75 or Section 75A of the Pensions Act 1995 if the scheme is underfunded on a buy-out basis. This Section 75 debt is unsecured and contingent until triggered. The debt is triggered on the winding-up of the relevant scheme, the insolvency of an employer, or when a participating employer in a multi-employer scheme withdraws while the scheme is ongoing.