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PENSIONS: An Introduction

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Pensions Legal Overview 

It has been another highly eventful year for pensions, with the war in Ukraine and soaring inflation resulting in continuing economic uncertainty. Despite this, there has been no shortage of consultations in 2022, with the pensions world playing catch-up following the hiatus caused by the pandemic.

DB schemes – changes 

Funding and investment strategy  

The Pension Schemes Act 2021 (“PSA21”) set the scene for a new requirement for defined benefit (“DB”) schemes to have a longer-term focus on the funding level which the trustees intend to achieve, and the investments they intend to hold, on a relevant date or dates in the future. Known as the “funding and investment strategy”, the target is to achieve “low dependency” on sponsoring employers by the time a DB scheme is “significantly mature”. Draft regulations and a revised funding code of practice being produced by The Pensions Regulator (“TPR”) are likely to put the new strategy firmly on the menu in the latter half of 2023. Sponsoring employers will also have a seat at the table, as their agreement to a written statement capturing the strategy’s core ingredients will be needed.

Sponsoring employers must also be consulted on certain other elements in the mix, including “the main risks faced by the scheme in implementing” the new strategy, and how the trustees intend to mitigate or manage them.

New notification requirements 

New requirements to disclose information about certain corporate activity to TPR, and in some cases trustees, have also been cooking up a storm this year. Originally expected to come into force in April 2022, at the time of writing final regulations have yet to materialise.

The notifiable events regime requires both trustees and employers to notify TPR of certain events. Two new employer-related events will be dished up, relating to material sales and granting or extending certain security, resulting in corporate plans having to be divulged at a much earlier stage and potentially multiple times.

With the new notifiable events possibly coming into force at very short notice, planning ahead is essential, as DB sponsoring employers are likely to have to act swiftly.

DC guidance – absolute beginners? 

Trustees or managers of occupational pension schemes are now required to deliver a “stronger nudge” in relation to members’ applications (and communications in relation to applications) to transfer or start receiving “flexible benefits”. This includes not only benefits in defined contribution (“DC”) schemes, but also any DC benefits held within DB schemes, such as pots built up from additional voluntary contributions paid by members.

As part of delivering the stronger nudge, trustees and managers will have to refer relevant members to appropriate pensions guidance, explaining its nature and purpose, as well as facilitating an appointment. Unless a member confirms that they have received the guidance or they provide a suitable opt-out, trustees or managers may be required to keep repeating certain parts of the stronger nudge.

Commencing dashboards countdown, engines on… 

With the groundwork laid by the PSA21, a new online portal designed to match individuals with their pensions, enabling them to see all relevant information in one place, is due to switch its ignition on in spring 2023.

Under draft regulations due to be finalised later this year, trustees and managers of all tax registrable UK-based occupational pension schemes with 100 or more members (excluding pensioners) will need to:

• register their scheme and connect to the “digital architecture” by a specific “staging date” set by the legislation, with large master trusts and large DC schemes used to fulfil an employer’s automatic enrolment obligations the first in line for lift-off;

• ensure their scheme can receive “find” requests sent by the dashboards service to all schemes searching for a potential pensions match; and

• allow members to “view” relevant pensions information.

Key steps that trustees and managers can be taking now to ensure they make the dashboards grade include pinpointing their staging date, ensuring relevant data is in good shape, and deciding how best to connect to the new system.

Minimum pension age – golden years 

The age at which members of tax registered pension schemes can generally start taking their benefits, other than on grounds of ill-health, is set to rise again from age 55 to 57 in April 2028. This is not the first such hike in “normal minimum pension age” (“NMPA”), as it last increased from age 50 to 55 in April 2010.

Whilst this change might seem some way off, its impact is already being felt. This is because, subject to certain conditions being met, a member may have a protected right to retire below age 57 which will survive beyond 2028. This protection can even be transported to a new arrangement. However, where the individual is transferring alone, and not as part of a bulk exercise, the protection will only apply to transferred benefits (which will need to be ring-fenced in a receiving scheme) and not to anything built up in the future.

Increasingly mobile workforces mean that pensions transfers are extremely common. But, as paying pensions before NMPA where no protection exists could result in very high tax charges, some schemes may start thinking twice before taking on board this added complexity.  

Age discrimination – under pressure? 

When age discrimination legislation was first introduced back in 2006, two important exemptions were included for occupational pension schemes:

• the first allowed certain common practices and measures to be used or maintained without needing to be specifically objectively justified by sponsoring employers and trustees; and

• the second excluded periods of scheme membership prior to 1 December 2006 from the scope of the age discrimination requirements.

Charged with assessing claims from individuals about their entitlement to compensation from the pensions lifeboat, the Pension Protection Fund, the Employment Tribunal recently challenged the second exemption’s compatibility with the EU Directive responsible for the UK’s age discrimination legislation.

Removing the second exemption would mean that practices and measures applicable to scheme membership prior to 1 December 2006 would suddenly fall within the scope of age discrimination legislation. The significance of this may depend upon whether there are other grounds to justify such practices or measures, for example because they are specifically permitted by the first exemption (assuming that remains unchallenged). But if the upshot is that a particular practice or measure has to be specifically objectively justified, with trustees and/or sponsoring employers having to demonstrate retrospectively that it was a proportionate means of achieving a legitimate aim, this is unlikely to be straightforward.

Whilst Employment Tribunal decisions only bind the parties to them, with an appeal pending, this case could have us all running for the shadows for some time to come.