The Pension Schemes Bill promised in the Queen’s Speech has been introduced into Parliament. At nearly 200 pages the Bill is comprehensive, wide-ranging and ticks many of the boxes on the Pensions Regulator’s wish list. It substantially reflects the Bill which briefly appeared in the autumn: this time, it seems likely to make it to the statute book. The Bill as drafted has potentially far-reaching implications, if it is passed substantially in its current form.
Transactions and restructuring
A number of changes, some controversial, could affect corporate transactions and restructurings.
There are two new criminal offences: “avoidance of employer debt” and “conduct risking accrued scheme benefits”. These are widely drawn and, on their face, could cover group restructuring, business sales, increases in debt, dividend payments or reduced employer support. The Government’s White Paper had targeted the offences at employers and their associates, but under the Bill they can be committed by “any person”. In principle this could catch employees, trustees or advisers: the only express carve out is for individuals acting in their capacity as insolvency practitioners.
There are changes to the contribution notice (CN) regime, which allows TPR to demand sums from parties connected or associated with a scheme employer. TPR may currently issue CNs up to six years after an act causing material detriment to the scheme or preventing recovery of the full section 75 debt.
Under the Bill, failure to comply with a CN will become a criminal offence. TPR will also be able to issue CNs where an act materially reduces the likely recovery from an employer on insolvency, or materially reduces an employer’s resources. Critically - unlike previous CN legislation - there is no cut-off date in the Bill, raising the spectre that TPR could use its new powers in relation to acts that have already taken place. We hope the Government will provide clarity as to whether this is really the intention.
New “declaration of intent” provisions will compel employers to tell TPR (and the scheme trustees) about specified events in advance. The events will be defined in regulations but are expected to include the sale of a controlling interest in the employer, the sale of a specified proportion of the employer’s business or assets and the granting of security in priority to the scheme. Failure to notify could attract a penalty of up to £1m.
Trustees of DB schemes must determine a formal “funding and investment strategy” for providing benefits over the long term, and set this out in a Chair’s statement to be submitted to TPR. The statement needs to explain the risks the strategy might pose to the scheme and how they will be mitigated; the trustees’ view of their success in implementing the strategy; and trustee reflections on significant past decisions and lessons learned. Schemes have to calculate their liabilities consistently with the agreed strategy. TPR will be able to intervene and potentially direct that the strategy be revised.
The Bill aims to crack down on pension scams. There is a regulation-making power to tighten control of members’ rights to insist on a transfer-out of their benefits. According to an impact assessment released last autumn, the regulations will restrict the destination of statutory transfers to either (i) personal pension schemes; (ii) authorised master trusts; (iii) pension schemes with a genuine employment relationship between the member and the scheme; or (iv) certain qualifying overseas schemes. Requirements being canvassed for establishing the employment link include the provision of payslips, bank statements and a copy of the receiving scheme’s schedule of contributions.
The Bill greatly boosts TPR’s information-gathering armoury. There will be civil penalties of up to £1m for knowingly or recklessly providing false and misleading information either to TPR, or to trustees. TPR may also require anyone who it considers holds information relevant to its functions to attend an interview and it will be a criminal offence to refuse without reasonable excuse. TPR will be empowered to enter premises to investigate whether it has grounds to use its moral hazard powers, and to inspect certain employer documents.
What else is in the Bill?
The Bill paves the way for some big-picture pension reforms too, aimed at the longer term. Large portions of it sketch out the statutory framework for the authorisation and supervision of new collective money purchase schemes, and the much-vaunted pensions dashboard initiative. At the same time, the Bill quietly kills off the unloved “defined ambition” framework, introduced in 2015 but never brought into force.
And, like any good pensions Bill, there is a smattering of more minor tweaks (such as clarifying the definition of pensionable service for the PPF compensation cap and amending the DC charge cap to exclude certain administration costs).
Missing in action
It’s worth noting that several past initiatives slated by the Government have not (yet) made it into the Bill. These include the proposed authorisation regime for DB superfunds; promised changes to the Pensions Ombudsman’s jurisdiction and remit; amendments to GMP conversion legislation; streamlining TPR’s process for issuing financial support directions; and amendments to reflect the impact of the Hampshire and Bauer CJEU insolvency cases.
What happens next?
This is only the start of the journey. Nothing is settled until the Bill receives Royal Assent.
We await a date for the Bill’s second reading, which will see it debated in the House of Lords before it travels through the rest of Parliament. We anticipate a number of consultations on discrete sections of the Bill, which may provide more colour as to how the changes will work.