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PENSIONS: An Introduction

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Pensions Legal Overview 

After a temporary suspension last year in response to the global pandemic, the pensions legislative and regulatory conveyor belt has now gone into overdrive.

Following a scandal or two, a new Pensions Schemes Act (“PSA21”) hit the statute books early in 2021. In what is undoubtedly the most significant piece of legislation in this area in over a decade, the powers of the Pensions Regulator (“TPR”) will be upgraded, bolstering its ability to curb behaviour by “reckless bosses who plunder people’s pension pots”.

There’s a new Act in town 

With plenty in store for both defined benefit (“DB”) and defined contribution (“DC”) schemes, selected highlights from PSA21 include:

• extensions to TPR’s criminal and civil sanctions, many of which will be in force from 1 October 2021;

• new events to be notified to TPR relating to activities by DB sponsoring employers and two new snapshot tests for imposing a contribution notice. Contribution notices are part of TPR’s existing anti-avoidance powers, under which it can require payment to be made into a scheme with DB benefits by sponsoring employers and anyone associated or connected;

• a requirement for DB trustees to determine, with the agreement of sponsoring employers, a strategy for ensuring that scheme benefits can be provided over the long term. Known as the “funding and investment strategy”, its introduction is due to dovetail with TPR’s new DB funding code of practice which is not expected to come into force until late 2022; and 

• the development of pensions dashboards, which are likely to be available from 2023 and will allow savers to view benefits across multiple schemes through a single portal.

Taking care of business? 

Two of the new criminal sanctions, avoidance of a statutory employer debt and conduct risking accrued DB benefits, have set alarm bells ringing in the pensions world. Punishable by an unlimited fine and/or up to seven years in prison, both have the potential to capture a wide range of corporate activity, as well as a broad spectrum of people (including directors of sponsoring employers, shareholders, trustees and advisers).

TPR’s proposed policy approach towards investigating and prosecuting these two new criminal offences is guided by its understanding that they are aimed at “the more serious intentional or reckless conduct”. Its overall intention, therefore, is that the offences will help “to deter conduct that could put pension schemes at risk”.

Whilst the new criminal sanctions have hogged the headlines, as an alternative, TPR will be able to impose a new civil penalty of up to £1 million. Such a penalty could also apply where a person provides false or misleading information to TPR or DB trustees. By avoiding Court costs and the higher burden of proof inherent in criminal proceedings, the civil penalty route looks set to be the more well-trodden path by TPR.

Reassurances to date as to when TPR might deploy its new powers have helped allay some industry fears, but many shades of grey remain. As a result, we may well witness a more cautious approach to corporate behaviour until the legal position becomes clearer. Pensions legal advice is, therefore, an absolute must.

Climate change – the heat is on! 

Back in 2017, the Taskforce on Climate-related Financial Disclosures (“TCFD”) published 11 recommendations for all organisations, aimed at identifying, assessing, managing and disclosing climate-related financial risks and opportunities. The Government subsequently outlined plans for all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022.

As large asset holders, provisions being implemented under PSA21 will require certain trustees to up their climate change game. Being phased in, the new requirements will apply to both authorised master trusts and occupational pension schemes whose net assets are £5 billion plus from 1 October 2021. Schemes with £1 billion or more assets will follow suit from October 2022.

Trustees of schemes in scope will need to satisfy the 11 TCFD recommendations, and to produce and publish (on a publicly available website, accessible free of charge) an annual report on how they have done so. To ensure that they are properly equipped to understand and take account of required scenario analysis and calculations relating to emissions-based metrics, trustees must also have an appropriate degree of knowledge and understanding. Given the technical legal requirements involved, specialist help will likewise be essential.

When 10 become one 

Having been on the cards for a few years, TPR finally consulted on its draft single code of practice earlier in 2021, which will bring together 10 of its 15 existing codes into a single and more user-friendly document. Current governance expectations have been updated to reflect the second European Pensions Directive (which the Government was committed to before Brexit), as well as the “seismic changes” in the pensions landscape over the past decade.

The code aims to make it easier for governing bodies, and those providing them with professional services, to distinguish between legal duties that must be met and TPR’s expectations. But this distinction is not always abundantly clear, nor is it necessarily apparent where TPR’s expectations have changed. Hopefully some of these uncertainties will be ironed out before the code comes into force, scheduled for summer 2022.

Is it all about the DC price tag? 

In DC arrangements, the members tend to bear all of the investment risk. The onset of automatic enrolment obliged employers to provide certain workers with access to good quality pension savings, with DC provision the most commonly used vehicle. Unsurprisingly, ensuring members receive appropriate value from their DC (automatic enrolment) membership quickly became a Government priority.

Current DC developments on the cards include introducing a de minimis pot size (initially set at £100) below which flat fees cannot be charged in so-called default funds. Anticipated to come into force in April 2022, the changes are part of a move to help protect individuals “from high and unfair charges” eroding their pension savings.

When it comes to delivering value, greater DC consolidation is also very much in the Government’s sights. Factors in favour include that larger schemes are perceived to be better governed, less prone to failure, investments are likely to perform better, and portfolios are likely to be more diverse.

In respect of scheme years ending after 31 December 2021, trustees of DC or hybrid schemes with less than £100 million in total assets will generally be required to undertake a “more holistic” annual value for member assessment. The upshot will then need to be reported in the annual chair’s statement and scheme return. If the scheme is not delivering good overall value, subject to certain exceptions, it will be expected to wind up and consolidate its assets into a larger arrangement.

The Government has also taken many by surprise by looking ahead to a possible “second phase of consolidation for medium to large schemes", affecting DC schemes with assets between £100 million and £5 billion.

Guaranteed minimum pensions – there’s no limit? 

Back in 2018, the Lloyds judgment held that, where relevant, benefits need to be equalised for the effect of guaranteed minimum pensions (“GMPs”). As a substitute for an element of state pension at the time, GMPs inherited many of the unequal features of that benefit, not least unequal retirement ages for men (65) and women (60).

A few new chapters in the never ending GMP equalisation story have been released over the last year, including another Lloyds judgment in November 2020. With the same judge once again at the helm, this confirmed that DB scheme trustees should, in certain circumstances, top up past transfers involving unequalised GMPs. Making an appearance in an unconnected case, the same judge also confirmed his previous views about the timeframe for bringing a pensions claim. In short, where trustees are still in possession of the trust property, there simply are no time limits!