With the Pension Schemes Bill receiving Royal Assent, Mr. David Fairs, The Pensions Regulator’s Executive Director of Regulatory Policy, Analysis and Advice, takes a whistle-stop tour of the new law and why it’s a defining moment in TPR’s mission to protect savers.
The Pension Schemes Bill has finalised the last stage of its journey to becoming an Act.
It’s been a long time coming and defines a pivotal moment in TPR’s aim to safeguard savers. But, Royal Assent isn’t the end of the story here.
Some of the Act’s provisions won’t begin straight away, with many also requiring regulations from DWP. TPR will be engaging with the pensions industry and supplying guidance in due course to help it navigate the changes brought by the new law.
The Act gives a strong package of measures which will make using our powers more efficient and introduces deterrents against behaviour that risks savers’ benefits. The changes in the Act will also help us direct better standards across the schemes we regulate and better equip us to protect savers.
Enhanced information-gathering powers will vastly aid our investigations by giving us more tools to progress them effectively and efficiently, including by being able to compel people to attend interviews and giving us broader powers to conduct inspections.
New fixed and growing civil penalties for breaching our information-gathering powers will mean fast, proportionate enforcement action can be taken against those who delay or fail to comply with our requests for information. This will help us secure the information we need earlier.
A civil penalty of up to £1 million has been introduced for those who:
- purposely provide false information to us or trustees, or
- failure to comply with requirements under the notifiable events framework
New offences, with a possible seven-year jail term and unlimited fine, have been launched for avoiding employer debt to a scheme or behaviour risking members’ benefits accrued under a scheme.
The Act will strengthen our contribution notice (CN) power. Our casework shows that events that affect an employer can subsequently weaken its ability to support a scheme, for example specific restructuring situations. So, in addition to the existing main purpose and material detriment tests, the Act introduces two additional tests to determine if what a target did is in scope for our CN power. These will focus, on a snapshot basis, at the impact of an act, or a failure to act, on:
- the sums that would be recovered by the scheme in the hypothetical event of an employer’s insolvency – the employer insolvency test
- the value of the employer’s resources comparative to size of the scheme – the employer resources test
The new powers included in the Act will require updating codes and producing new guidance. We will work with specialists to ensure these powers are understood.
Defined Benefit (DB) Funding
The Act builds on the current approach to DB funding and sets new requirements, which will help trustees focus on long-term planning and clarifies what is expected of schemes based on their own circumstances. Regulations will be developed by the government providing more details.
We are dedicated to the scheme-specific regime and we are looking at the next steps ensuing from the legislation, which is to develop a funding code that works for all schemes, including those that are open. These factors were part of the first consultation on the DB Funding Code.
As the Act’s measures were being developed, it was confirmed many schemes are doing the right thing. But there is enhanced focus on helping trustees manoeuvres through the end game for their DB schemes.
However, there are a small number of schemes that manipulate the flexibilities in the system. We are seeking to provide clarity of what is expected of trustees and employers in legislation, such as setting a long-term funding objective, a journey plan of how to get there and how risk should be handled along the way.
Schemes already doing the right thing should find this easy to achieve and the greater clarity should help us take action where we see non-compliance.
Our second funding code consultation will take place during the second half of 2021.
Many pension advisers believe the Act highlights that pension scheme trustees should be considering the effects of climate change and will need them to partake more fully with the risks and opportunities arising from the reaction to this global emergency.
We welcome the assumption that all schemes must face some degree of material risk from climate change (for example, even assets of de-risked schemes carry climate risk, through the risk of climate-induced default, downgrades or value impairment following policy responses by governments internationally).
A scheme that does not consider climate change is disregarding a major risk to pension savings and missing out on potential investment opportunities.
Formerly, schemes only had to consider climate change where trustees said it was financially material.
Now these fresh measures totally bake in that consideration for schemes in scope and trustees are expected to step up and put climate change at the heart of scheme governance.
They will need to think about all risks more thoroughly – and the opportunities a transition to a low-carbon economy may bring.
TPR is one part of the financial system and these measures magnify the need for us to continue to work closely with other regulators in ensuring that climate change risk is properly priced into the system.