'Down but not out': the Pension Schemes Bill

In October 2019, the Queen's speech confirmed that there would be new draft legislation for pensions and this was quickly followed by the long-awaited Pension Schemes Bill 2019-20. However, the Bill fell away when Parliament was prorogued in November in advance of the General Election on 12 December 2019. When and in what form the content of the Bill will again go before Parliament will depend upon the outcome of the UK election. However, the Bill is widely reported to have cross-party support and, consequently, it is important for trustees and employers to be aware of its content.

New powers

We have previously reported on a consultation and a response on proposed new powers for the Pensions Regulator. The Bill includes most of the changes set out in the response and goes further than expected in some areas.  

Scheme funding 

The Bill would amend defined benefit (DB) scheme funding legislation to require trustees to set a "funding and investment strategy" and prepare a "written statement of strategy":

• The funding and investment strategy will be the trustees' strategy for "ensuring that benefits … can be provided over the long term".
• The basic idea of the written statement of strategy will be to explain the trustees' approach to achieving their funding and investment strategy.
• It looks as though trustees will need to review their funding and investment strategy and written statement of strategy at the time of each actuarial valuation.
• Trustees will need the employer's agreement to the funding and investment strategy. They will also need to consult the employer on the rest of the content of the written statement of strategy.
• The scheme's technical provisions will need to be calculated in a way that is consistent with the funding and investment strategy.
• When the funding and investment strategy and written statement of strategy are ready, the Chair of trustees will need to sign the written statement of strategy and submit it to the Pensions Regulator with the rest of the valuation documents.
• The Pensions Regulator will have new powers to act if trustees have not complied with the requirements for their funding and investment strategy. It will also be able to direct trustees to revise their funding and investment strategy. 

Moral Hazard 

The Bill would make significant changes to the moral hazard regime. For example:

• There will be two new grounds for issuing a contribution notice: the "employer insolvency" test and the "employer resources" test. In broad terms, the "employer insolvency" test involves looking at whether, if a section 75 debt were to become due immediately after an act or omission, that act or omission would materially reduce the amount of debt likely to be recovered by the scheme. The "employer resources" test looks at whether an act or omission materially reduces the value of the employer's resources relative to the amount of the estimated section 75 debt. Defences will be available in closely defined circumstances.
• The factors that the Pensions Regulator can take into account when deciding whether it is "reasonable" to issue a contribution notice will be extended to include two new factors, including the effect of the act or omission on the value of the assets or liabilities of the scheme or any transferee scheme.
• The date, with reference to which the maximum amount for which the Pensions Regulator can issue a contribution notice is determined, is being moved to bring it closer to when the contribution notice is issued.
• There will be a requirement for employers and other related parties to prepare a "declaration of intent", in relation to certain transactions, to be shared with the trustees and the Pensions Regulator. These transactions, which will also be notifiable events, are expected to be: (i) the sale of a controlling interest in an employer; (ii) the sale of a material proportion of the business or assets of an employer where the employer has funding responsibility for at least 20% of the scheme's liabilities; and (iii) the granting of security on a debt to give it priority over the debt owed to the pension scheme.

Criminal offences, civil penalties and information gathering powers 

The Bill would also introduce a series of criminal offences, a power to issue a civil penalty of up to £1 million, and greater information gathering powers.  For example, there will be:

• Seven new criminal offences, some of which will be punishable by fine and some by fine and or imprisonment. The offences are (i) failing, without reasonable excuse, to pay the sum specified in a contribution notice by the due date; (ii) (broadly) preventing the recovery of, or affecting the prospect of recovery of, all or part of a section 75 debt; (iii) acting or failing to act in a way that materially and detrimentally affects the likelihood of accrued scheme benefits being received; (iv) knowingly or recklessly providing the Pensions Regulator with information that is false or misleading when reporting a notifiable event; (v) knowingly or recklessly providing the Pensions Regulator with information that is false or misleading in a "declaration of intent"; (vi) failing to attend an interview with the Pensions Regulator; and (vii) providing information which is false or misleading in a "statement of strategy" (see Scheme funding above).
• Seven circumstances in which the Pensions Regulator will be able to issue a financial penalty of up to £1 million.  In some cases, the fine will be as an alternative to prosecution for the related criminal offence: (i) failing, without reasonable excuse, to pay the sum specified in a contribution notice by the due date; (ii) (broadly) preventing the recovery of, or affecting the prospect of recovery of, all or part of a section 75 debt; (iii) acting or failing to act in a way that materially and detrimentally affects the likelihood of accrued scheme benefits being received; (iv) failing to notify the Pensions Regulator of a notifiable event; (v) failing to comply with the requirements around a "declaration of intent"; (vi) knowingly or recklessly providing the Pensions Regulator with false or misleading information, either in specified circumstances (for example, in a scheme return, notifiable events report, "declaration of intent" or in response to a request for information), or generally where you intend or should have known that the Pensions Regulator would use the information in exercising its functions; and (vii) knowingly or recklessly providing a trustee with false or misleading information, either in specified circumstances, or generally where you intend or should have known that the trustees would use it in their capacity as trustees. Insolvency practitioners are in scope, for example, for knowingly or recklessly providing a trustee with false or misleading information.

In addition, the bill would give the Pensions Regulator:

• The power to require trustees, employers and professional advisers to attend an interview to answer questions and provide explanations on matters relevant to the exercise of any of its functions.
• Greater powers to inspect premises. The list of premises the Pensions Regulator can inspect will increase and it will be able to inspect in cases where it is investigating whether it has grounds to issue a contribution notice or financial support direction.
• The power to impose fixed and escalating fines in relation to things like failing to provide information, or to attend an interview, when requested. 

Collective DC, dashboards and others

The government gave its consultation response on Delivering collective defined contribution schemes in March 2019. The Bill contains the provisions needed to introduce the legal and regulatory framework for this type of scheme.  In the Bill, "collective defined contribution" becomes "collective money purchase" and there is provision for an authorisation regime on similar lines to the one for defined contribution (DC) master trusts.  At the moment, the main aim is to create a framework that will allow Royal Mail to put a collective money purchase scheme into place for its staff. This is reflected in the Bill which confirms that, to begin with, only a "single employer, or two or more employers that are connected to each other" will be able to operate a collective money purchase scheme or section. However, there is also a power to change the law to make this type of scheme more widely available.

Of more immediate relevance for most trustees and employers, the Bill also provides for pensions dashboards.  It introduces a power to make regulations that oblige trustees to provide, or facilitate the provision of, pensions information by means of a pensions dashboard.  For the time being, however, it is still not clear exactly what information schemes will need to provide.

The Bill would also make some changes to:

• Statutory transfer rights. The Bill includes a power to make regulations to restrict the statutory transfer rights by imposing conditions and requirements for evidence relating to a member's employment or place of residence. The aim would be to reduce the risk of a member transferring to a scam scheme, in which the "employer" does not actually employ the member and/or is based in a completely different part of the country.
• Pension Protection Fund (PPF) compensation rights.  The bill includes a final "fix" for the problem created by the decision in Anthony Beaton v the Board of the PPF.  It takes the last step needed to ensure that a fixed pension granted on transfer in is in scope for PPF compensation for survivor benefits, increases in deferment and increases in payment, but will not be aggregated with other benefits for the purposes of applying the PPF compensation cap.
• The definition of "administration charges".  The bill provides for a number of Acts and sets of regulations to be changed to clarify the meaning of "administration charges". These changes would be relevant, for example, to the DC charge cap.

'Also rans'

The bill does not contain everything that we were expecting to see. For example, it does not make any changes to the Financial Support Direction regime.  Nor does it contain any provisions relating to DB commercial consolidator schemes, also known as "DB superfunds".  The response to last December's consultation on DB superfunds seems to be heavily delayed. 

Osborne Clarke comment 

Trustees and employers should discuss the Pension Schemes Bill with their legal and actuarial advisers. Although the Bill does not answer every question (a lot of the detail will need to be confirmed in regulations and guidance) it does represent a clear step forward and trustees, employers and insolvency practitioners need to understand how it could affect them.

In particular, employers who are considering (and trustees who become aware of) any change which could affect a DB scheme should discuss with their legal advisers the potential for the new moral hazard provisions to apply to changes that are made now before the bill becomes law.  Employers and trustees should also review their internal controls to take account of  the circumstances in which they could commit one of the new criminal offences or incur a civil penalty of up to £1 million.