PENSIONS: An Introduction

In response to the unprecedented challenges posed by COVID-19, The Pensions Regulator (TPR) announced a series of temporary regulatory easements to help pension schemes.

With large portions of Parliamentary time diverted elsewhere, the Pension Schemes Bill’s progress has been somewhat slow. But with Royal Assent expected later in the year, the Bill will introduce new criminal and civil sanctions designed to bolster TPR’s powers to tackle “reckless bosses who plunder people’s pension pots”. Other changes of interest include the review of DC costs and charges, and the pensions implications of the Corporate Insolvency and Governance Act.

The pensions regulatory picture of COVID-19 

Early in lockdown, TPR’s regulatory easements came as a great relief to many. Whilst several of TPR’s initial concessions have now fallen away, some remain. But despite its general return to business as usual, TPR promises “a flexible and pragmatic approach where breaches are COVID-19 related”.

Defined benefit (DB) schemes 

Easing cash flow in uncertain times is key for many employers. For those with DB schemes, the possibility of temporarily reducing or suspending deficit repair contributions may be a way of helping to achieve this.

TPR has been sympathetic towards companies looking to use such options, making clear that trustees should “be open to reasonable requests”. However, TPR also expects trustees “to make an informed assessment of whether it is in members’ best interests to agree”.

Whilst it may have been necessary at the beginning of the crisis to agree stop-gap arrangements quickly and with limited information, employers seeking either to extend existing arrangements, or to put new ones in place, can now expect more rigorous due diligence. TPR will also want to see the DB scheme being treated fairly, with other stakeholders expected to share the pain.

Subject to certain conditions, trustees were initially given the green light to temporarily pause DB transfers. Whilst this concession has ended, flexibility in the legislation provides trustees with additional time (up to three months) to issue transfer quotations for reasons outside their control. There is also the possibility of applying to TPR for an extension on limited grounds.

The vulnerability of members to potential scammers continues to be an area of keen regulatory focus. Trustees are now required to issue a template letter to all DB members requesting a statutory transfer, and to report unusual or concerning transfer activity to the Financial Conduct Authority.

Defined contribution (DC) schemes 

The Coronavirus Job Retention Scheme (CJRS) is set to run at least until 31 October 2020. Whilst employer pensions contributions formed part of the original grant, they were based on the DC statutory default for automatic enrolment purposes, being 3% of banded earnings (ie total earnings between £6,240 and £50,000 for the 2020/21 tax year). As there may be a mismatch between what is payable under the CJRS and the contributions an employer is obliged to pay (under scheme rules or the automatic enrolment legislation), some employers may be left out of pocket.

For employers with at least 50 employees, reducing DC contributions usually triggers a requirement for a minimum 60-day statutory consultation. With employers subsequently picking up the pensions tab under the CJRS, subject to certain conditions, TPR has allowed employers to temporarily reduce contributions without running a full consultation. However, an employer considering such a change should seek legal advice beforehand, as there are a number of potential hurdles to overcome.

TPR’s new powers – great expectations 

A string of reports over the last few years have focused on improving the way in which the current DB legislative and regulatory system works, the aim being better member protection. The Pension Schemes Bill is designed to arm TPR with significant new powers, allowing it to fulfil its “clearer, quicker, tougher” mantra.

TPR already has a broad range of powers to help it regulate occupational pension schemes, including anti-avoidance powers enabling it to act against a sponsoring employer (and those associated or connected with it). These include requiring a payment to be made into a scheme under a “contribution notice”.

In future, failure to comply with a contribution notice will be punishable by an unlimited fine. In addition, avoiding a statutory employer debt, and conduct risking accrued DB scheme benefits, will be punishable by an unlimited fine and/or up to seven years in prison. There is concern that these new criminal sanctions could potentially capture ordinary business activity. Unlike TPR’s other anti-avoidance powers, there is also a broad range of possible targets.

As an alternative to the criminal sanctions, and in other specified circumstances (such as where a person provides false or misleading information to TPR or the trustees), TPR will also have power to impose a civil penalty of up to £1 million.

Whilst the Bill may change between now and Royal Assent, TPR’s new powers look very much set to stay.

A tale of distressed employers 

Expedited as a result of COVID-19, the Corporate Insolvency and Governance Act seeks to provide businesses in financial difficulty with the flexibility and breathing space needed to explore their options. Provided certain conditions are met, a business can obtain a moratorium potentially lasting up to a year.

The moratorium provides a payment holiday from debts falling due before and during the moratorium. However, there are exceptions to the general payment holiday rule, which include contributions to an occupational pension scheme arising under a contract of employment.

The precise meaning of this exemption is currently unclear, although deficit repair contributions to a DB scheme would seemingly fall out of scope. Puzzlingly, the Act also overlooks contributions to personal pension arrangements, although we assume this is an oversight which will be remedied in due course.

The importance of costs and charges 

Continuing the trend to improve governance standards, the Government launched a call for evidence seeking views on the effectiveness of costs, charges and transparency measures in protecting DC member outcomes.

A cap on charges was introduced in 2015, with the aim of protecting individuals who are automatically enrolled into a DC pension scheme from “high and unfair charges”. Set at 0.75%, it generally only applies to the default fund of a DC auto-enrolment scheme, and covers all member-borne charges associated with scheme and investment administration.

Proposals for revising the cap include bringing transaction costs (variable trading costs that a pension scheme incurs as a result of buying, selling, lending and borrowing investments) into scope. The possibility of lowering the level of the cap, and restricting the use of flat-fee structures (which can disproportionately affect small DC pots), is also considered.

Not so far from the madding crowd… 

Other key pensions developments on the radar include:

• guaranteed minimum pensions (GMPs) – following the Lloyds judgment back in 2018 that, where relevant, benefits need to be equalised for the effect of GMPs, a raft of guidance notes have been published. At the time of writing, two crucial elements are awaited: a further judgment relating to transferred-out benefits, and HM Revenue guidance on the tax implications of converting GMPs into ordinary DB benefits (as permitted by legislation); and

• DB scheme funding – a new code of practice is expected to come into force late 2021, and a new requirement to have a funding and investment strategy in place (looking to the longer term) will be brought into force under the Pension Schemes Bill.

So, all in all, the current pensions chapter is set to be a long one.