An act to protect pension savers

With the Pension Schemes Bill receiving Royal Assent, 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 watershed moment in TPR’s mission to protect savers.

The Pension Schemes Bill has completed the final stage of its journey to becoming an Act.

It’s been a long time coming and marks a watershed moment in TPR’s mission to protect savers. But, Royal Assent is not the end of the story.

Some of the Act’s provisions won’t commence straight away, with many also requiring regulations from DWP. TPR will be engaging with the pensions industry and providing guidance in due course to help it navigate the changes brought by the new law.

Powers

The Act provides 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 drive better standards across the schemes we regulate and better equip us to protect savers.

Enhanced information-gathering powers will significantly 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 escalating 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 sooner.

A civil penalty of up to £1 million has been introduced for those who:

deliberately provide false information to us or trustees, or
fail to comply with requirements under the notifiable events framework

New offences, with a potential seven-year jail term and unlimited fine, have been introduced for avoiding employer debt to a scheme or behaviour risking members’ benefits accrued under a scheme.

The Act also strengthens our contribution notice (CN) power. Our casework shows that events that affect an employer can subsequently diminish its ability to support a scheme, for example specific restructuring situations. So, in addition to the existing main purpose and material detriment tests to determine if what a target did is in scope for our CN power, the Act introduces two additional tests. These will look, on a snapshot basis, at the impact of an act, or a failure to act, on:

the amount 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 relative to size of the scheme – the employer resources test

The new powers included in the Act will involve updating codes and producing new guidance. We will work with industry to ensure these powers are understood.

Defined benefit (DB) funding

The Act builds on the existing 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 further detail.

We are committed to the scheme-specific regime and we are looking at the next steps arising from the legislation, which is to develop a funding code that works for all schemes, including those that are open. These aspects were part of the first consultation on the DB Funding Code.

As the Act’s measures were being developed, it was acknowledged many schemes are doing the right thing. But there is increased focus on helping trustees navigate through the end game for their DB schemes.

However, there are a small number of schemes that abuse the flexibilities in the system. We are looking 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 managed along the way.

Schemes already doing the right thing should find this straightforward to achieve and the greater clarity should help us take action where we see non-compliance.

Our second funding code consultation will take place in the second half of 2021.

Climate change

The Act highlights that pension scheme trustees should be considering the effects of climate change and will require them to engage more fully with the risks and opportunities arising from the response to this global emergency.

We welcome the assumption that all schemes will 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 globally).

A scheme that does not consider climate change is ignoring a major risk to pension savings and missing out on potential investment opportunities.

Previously, schemes only had to consider climate change where trustees said it was financially material.

Now these new measures thoroughly 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 these 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 reinforce the need for us to continue to work closely with other regulators in ensuring that climate change risk is properly priced into the system.

We will be launching our own climate strategy later in spring, which will explore these important issues in more depth. Our strategy will take a targeted, forward-looking approach and suggests that a landscape of resilient schemes that protect savings from climate risk is within reach.

This strategy will be comprehensive in setting out how TPR can help trustees meet those challenges – as well as how we can play our part in the low-carbon transition agenda.

Unfortunately, in this area, as in most if not all areas of life, there is no free lunch.