The 2021 Pension Schemes Act: An overview of the key provisions
After many years in the making, the 2021 Pension Schemes Act belatedly received Royal Assent on the 11th of February. Set to make essential changes to the UK pensions landscape, the various provisions of the new Act will be subject to much regulation and guidance before coming into effect, however, they include:
- Enhanced enforcement powers for The Pensions Regulator (TPR)
- A new funding regime for defined benefit (DB) schemes
- Restrictions around statutory transfers
- New climate change risk governance and disclosure requirements
- The introduction of a framework for ‘collective money purchase schemes’
- Pensions dashboards
Whilst the Act will have considerable implications for employers and trustees of DB pension schemes specifically, some of the provisions will apply to all occupational pension schemes. This means employers and trustees of defined contribution (DC) schemes should also ensure that they are aware of the upcoming changes relevant to them.
What will the new measures of the Pension Schemes Act entail?
With exact dates for the rollout of the proposed new measures still under review, we provide a summary as to what we know so far about the forthcoming developments.
Changes to the TPR’s powers
The new Act will grant the Regulator greater authority in several key areas, including:
- Enforcing sanctions for two new criminal offences, which could result in up to seven years in prison and/or an unlimited fine for the avoidance of section 75 employer debt or conduct risking accrued scheme benefits
- Issuing civil penalties of up to £1 million for non-compliance or omissions which align to the new criminal offences
- Additional grounds under which TPR can impose a contribution notice through two ‘snapshot’ tests i.e., the ‘employer insolvency test’ and the ‘employer resources test’
- An extension to the list of notifiable events, where a designated ‘appropriate person’ must provide information about corporate transactions in advance
- Enhanced information-gathering powers, such as further scope to inspect premises and requesting individuals to attend interviews
DB scheme funding
Likely to come into force in 2022, the Act will be introducing a requirement for trustees of DB schemes to put in place a long-term funding and investment strategy for approval by the scheme employer. This will need to specify the planned funding level for the scheme to achieve within a certain timeframe, alongside details of the investments that the trustees intend the scheme to hold once that deadline has been reached.
This legislation will operate in tandem with TPR’s new code of practice for DB funding which will follow a two-pronged compliance route to carrying out valuations – ‘fast track’ and ‘bespoke’.
Statutory right to transfer
Under the new Act, members will need to meet prescribed conditions before transferring their benefits to another pension scheme. Further clarification will be provided within upcoming regulations; however, the Act indicates that some conditions will relate to evidence about the member’s employment or place of residence, thus empowering trustees to make extra checks before paying a transfer value.
These measures are being instated to help protect consumers from pension scams by shifting the onus away from trustees so that they cannot make statutory transfers on behalf of members unless certain criteria have been met.
Climate change risk reporting
Regulations will be brought in requiring trustees to publish ‘information of a prescribed description’ about the effects of climate change on their pension scheme to meet enhanced governance requirements.
Aligning to the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations, trustees will need to implement an effective governance and risk management strategy, as well as accompanying metrics on climate risks and opportunities.
These new reporting requirements will affect occupational pension schemes with assets of £1 billion or more and authorised master trusts of any size. Schemes with assets of at least £5 billion, all master trusts and all collective DC schemes will need to comply with this new legislation from the 1st of October 2021.
Collective money purchase pension schemes
Also known as collective defined contribution (CDC) pension schemes, the Act will establish a framework that means such schemes must be subject to authorisation and supervision by TPR in order to operate.
Under this framework, benefits can be adjusted periodically to maintain balance between the available assets and the amount required to provide benefits. The use of collective money purchase schemes will be restricted to either a single employer or groups of connected employers.
Members will need to be well informed as to how these new schemes function, given that fluctuating funding levels could impact pensions in payment.
Last but not least, the Act will enable pension dashboards to be created so that members can view all of their pension savings on a single online platform. As part of this, trustees of occupational pension schemes will need to supply standardised benefit information to dashboard providers.
Full details of how this service will be implemented and administered will be set out in future regulations. It is expected that the first dashboards will be available from 2023 through a staged onboarding approach.
Similar requirements will also apply to personal pension providers, imposed by the FCA.
With tighter regulations pending as a result of the 2021 Pension Schemes Act, discover how our leading risk management software can help you to manage your business risks effectively and avoid non-compliance as the pensions landscape evolves.
Manage your business risks effectively
Our risk management software can help you to manage your business risks effectively & avoid non-compliance as the pensions landscape evolves.