This blog post looks ahead at what we expect to be key UK developments in the pensions space in 2021. Highlights include:
- the long anticipated Pensions Schemes Bill, which is expected to come into force in the autumn and which will have a significant impact on corporate activity (amongst other things);
- the continuing work on proposals to change the defined benefit (DB) scheme funding regime;
- an increased focus on the impact of climate change and pension scheme investments;
- an ongoing focus on transfers from DB to defined contribution (DC) schemes and pensions scams;
- an expectation that pensions superfunds will finally complete their first transactions; and
- schemes finally making substantive progress on GMP equalisation.
Pension Schemes Bill
The Pension Schemes Bill ('the Bill') completed its report stage and third reading in the House of Commons on 16 November 2020. The Commons amendments were then considered, and agreed, by the House of Lords on 19 January 2021 with the next step being Royal Assent. Our latest blog on the Bill can be found here. Particular points to focus on are as follows.
New criminal offences and increased financial civil penalties
The Bill would introduce two significant new criminal offences, carrying a maximum penalty of seven years in prison, which will significantly impact corporate activities of groups with a UK defined benefit pension scheme. Concerns have been raised by the pensions industry that the extremely broad scope of the new offences will disrupt ordinary business activity but to date the Government has offered little comfort in this respect, stating that it was not the Government’s intention to interfere with routine business activity and that the offences will only be committed where the party has no “reasonable excuse” for their actions. The next crucial piece in the jigsaw will be the promised guidance from the UK Pensions Regulator (TPR), which has been touted by Guy Opperman MP, the Parliamentary Under-Secretary of State for Pensions, as the means by which much needed comfort will be given to counter the breadth of the offences and some clarification will be provided as to the meaning of “reasonable excuse”. In this regard Mr Opperman has said that TPR will be consulting during 2021 on the content of the guidance. Helpfully, he has also confirmed that the new criminal sanctions will not apply retrospectively before the criminal provisions are brought into force. Further information on the new criminal offences can be found here. The Bill will also introduce increased financial civil penalties which will allow TPR to impose financial penalties for up to £1m in certain circumstances.
Wider “moral hazard” powers
TPR already has the power in some circumstances to issue a contribution notice to persons connected with a UK DB pension scheme, including where there is an act or failure to act that would materially detrimentally affect the likelihood of accrued scheme benefits being received. A contribution notice imposes a requirement to provide funding into the scheme in question. The Bill will provide two new grounds on which TPR could do this:
- an “employer insolvency test”, which is an act or failure to act that would materially reduce the level of the scheme’s recovery from the employer in a hypothetical insolvency; and
- an “employer resources test”, which is an act or failure to act that materially reduces the value of an employer’s resources.
- These financial tests are not tied expressly to the ability of the scheme to pay benefits and could come into play simply because a transaction reduces the net assets of the employer. Concerns have been raised that seemingly normal corporate activities, such as the payment of dividends, the raising of finance or a restructuring or other good faith decisions taken in a distress situation could be caught by these grounds.
Increased procedural requirements and investigatory powers
The Bill also proposes increases to the procedural steps that groups with UK DB pension schemes need to take in relation to corporate activity, including mandatory notifications to TPR and new pensions impact assessments. Further, the Bill strengthens TPR’s powers to gather information, including powers to summon people to interview and to inspect premises. Further regulations in relation to these powers will be crucial in giving some clarity and are awaited in 2021. Mr Opperman has stated that the government’s aim is for the new powers relating to corporate activity (i.e. the criminal offences, widened moral hazard powers, procedural requirements and new investigatory powers) to be available to TPR by autumn 2021.
Climate change and pension scheme investments
The Bill will allow regulations to be passed requiring pension scheme trustees to consider and report on climate change risks in relation to their investment strategy. Arguments have been made that the Bill does not go far enough in tackling climate change, and Labour proposed that the Bill should go further in requiring trustees to align their investment strategies with the Paris agreement. However, the government rejected this proposal due to concerns that this could encourage trustees to disinvest rather than engaging with investee companies on climate issues, and that there could be potential difficulties for trustees in acting consistently with their normal duties under trust law. The DWP is expected to consult later in 2021 on the draft regulations that will set out the full details of the new climate-risk governance and reporting duties, following the DWP’s initial consultation on this topic in 2020. It will be interesting to see the effect that the proposed reporting requirements will have in the pensions industry. Our latest blog post on this topic can be found here.
Scheme funding – see below.
The Bill will impose important new requirements for long-term funding strategies and may also result in greater powers for TPR to impose standards. The regulatory approach to be set out in TPR’s new Defined Benefit Funding Code of Practice ("the Code") is likely to pressure many trustees and employers to come within TPR’s expectations in relation to actuarial assumptions and deficit funding. There are concerns that many more schemes than expected will need to use TPR’s ‘Bespoke’ process which will involve considerably more TPR scrutiny and engagement, potentially resulting in significant delays in resolving valuations, as well as pressure on TPR’s case management resources. TPR published an interim response to the its first consultation in respect of the Code on 14 January 2021 which acknowledged that overall there was general support for the principles and regulatory approach proposed but some concerns were raised on how the principles would be applied in practice through the proposed twin-track regime (ie the “Bespoke” or “Fasttrack” process). A second consultation on the Code will be launched in the second half of 2021 and will focus on the draft Code itself and include a full summary of responses to the first consultation and the approach taken by TPR in relation to the responses.
There has also been an ongoing debate in relation to the treatment of open and closed DB schemes and whether or not they should be treated differently in the context of scheme funding. The Bill does not differentiate between open and closed DB schemes and concerns have been raised that failing to differentiate risks open schemes closing prematurely as a result of an over-emphasis on de-risking scheme investments. During the debate on the Bill in the House of Lords on 19 January 2021, it was confirmed that: the matter would be dealt with in regulations following a full consultation, that the government “fully intends that the defined benefit funding regime will remain scheme specific” and that, prior to the publication of the draft regulations, the Government commits to an engagement programme with interested parties. Additionally, the Government will publish a regulatory impact assessment of the draft regulations and TPR will publish an impact assessment alongside the revised Code which will include analyses of different de-risking approaches on members and sponsors of all types of schemes (ie closed DB schemes as well as open or immature DB schemes and those that are not targeting buyout). Further information on the current position of UK pension scheme funding is set out in our recent publications which can be found here and here.
Transfers of benefits
There is set to be considerable activity in the field of individual transfers of benefits.
Regulations will require trustees to carry out due diligence to test whether certain conditions have been met or any red flags exist before making a transfer, whether of DB or DC benefits. For scam prevention purposes, trustees will have the right to refuse a transfer if such red flags are significant. It remains to be seen how far those regulations will go in shifting the risk associated with individual transfer decisions onto trustees.
DB to DC transfers
The activities of firms advising pension scheme members on whether or not to transfer their DB pension to a DC scheme have faced increasing regulatory scrutiny during 2020 and we expect this to continue into 2021.
Transfer processes and timescales
In light of a recent Pensions Ombudsman decision, it is also important that trustees and administrators take appropriate action to ensure that they have robust processes in place to manage any delays to pensions transfers and that they communicate with members to understand whether there are any specific time-frames relating to their request. If they don’t, they may be at risk of paying compensation for any resulting investment losses. Our latest blog post on this topic can be found here.
Consolidator pension schemes, or “superfunds”, offer an alternative to buyouts of scheme benefits by insurers. In June 2020, TPR effectively gave the green light to the principle of bulk transfers of benefits to superfunds by publishing extensive guidance for trustees and employers considering a transaction with a superfund. Our briefing on that guidance is available here. Since then TPR has been working on confirming whether the existing superfund providers meet its requirements for interim approval to engage in such transactions.
At that time, the Department for Work and Pensions had indicated that it intended to put forward new legislation introducing regulatory requirements that would apply specifically to superfunds. However, there are currently no provisions for superfunds in the Bill and a proposed clause requiring that the legislation to regulate superfunds be put in place within a certain time frame was rejected. Despite this, we expect pensions superfunds to come more into focus in 2021 and it is likely that some transactions will go ahead under the interim regime published by TPR. Guy Opperman MP acknowledged the need for imminent legislation in this area, stating that “this Government must bring forward legislation in respect of superfunds in the fullness of time”. Meanwhile, on 21 October 2020, TPR published an update to its guidance for trustees and employers, which includes further clarification of its view of the conditions in which a transaction with a pension superfund can go ahead. Our blog post on this new guidance can be found here.
We expect that pensions schemes will finally make substantive progress on guaranteed minimum pension (GMP) equalisation in 2021. Following the most recent judgment in the Lloyds Bank case in November 2020, we would expect trustees to be proactive in correcting underpayments in relation to individual statutory transfers, rather than waiting for an affected member to obtain a court order. However, trustees face a significant administrative burden in carrying out this task and will need to take advice on what corrections of past payments it can reasonably be expected to make. Some important areas remain unclear and we expect this to be on ongoing priority in 2021.
There are a number of considerations which employers and trustees need to take into account coming out of the Lloyds Bank case, when resolving issues in relation to equalising GMPs - look out for our forthcoming guide on GMP equalisation for both employers and trustees. Further guidance is also expected to be published by the GMP equalisation working group established by the Pensions Administration Standards Association in early 2021. Our latest blog posts on GMP equalisation can be found here and here.