How the Pensions Scheme Act will change the landscape

The new­ly mint­ed Pen­sion Schemes Act 2021 her­alds momen­tous change. The ambi­tious leg­is­la­tion pro­vides greater safe­guards for the £2‑trillion defined ben­e­fit (DB) pen­sion sec­tor by extend­ing the Pen­sions Regulator’s sanc­tions regime with three new crim­i­nal offences, sev­en-year jail sen­tences for wrong­do­ers and civ­il penal­ties of fines up to £1 mil­lion for those who reck­less­ly neglect their respon­si­bil­i­ties to mem­bers. 

The act also brings in new fund­ing require­ments, includ­ing the need for DB schemes to set a legal­ly bind­ing long-term objec­tive, and a frame­work for the long-await­ed pen­sion dash­board with an opti­mistic launch date of 2023. The idea is to bring pen­sions into the dig­i­tal age, mak­ing infor­ma­tion about retire­ment sav­ings avail­able to savers via their smart­phone, tablet or com­put­er screens, there­by rev­o­lu­tion­is­ing the way we plan for lat­er life.

Savers will also be bet­ter pro­tect­ed from scams by tight­en­ing the rules and guid­ance required around trans­fers, ensur­ing sus­pect moves are red flagged and can­not pro­ceed before expert guid­ance is sought. Trustees too will have new duties to assess and report on the finan­cial risks of cli­mate change with­in their port­fo­lios.

Com­ment­ing on the new leg­is­la­tion, min­is­ter for pen­sions and finan­cial inclu­sion Guy Opper­man says: “It has made pen­sions safer, bet­ter and green­er. Safer, by crack­ing down on scams and unscrupu­lous boss­es. Bet­ter, by mak­ing pen­sions more acces­si­ble through the dash­board. And green­er, by encour­ag­ing invest­ment in a more sus­tain­able way.”

But beyond the well-mean­ing inten­tions of the gov­ern­ment, whether the act will achieve its laud­able objec­tives is open to ques­tion.

Glaring weaknesses in pension protection

The col­lapse of BHS and Car­il­lion with black holes in their pen­sion schemes high­light­ed glar­ing weak­ness­es in pen­sion­er pro­tec­tion. More wide­ly, 3,149 of the 5,318 remain­ing DB schemes have a mas­sive total deficit of £212.4 bil­lion and are in a pre­car­i­ous posi­tion. 

For­mer pen­sions min­is­ter Baroness Ros Alt­mann stress­es: “Too many employ­ers seem to have man­aged to pay hand­some bonus­es to senior staff, for exam­ple, while leav­ing their pen­sion deficit unad­dressed.”

There may be yet worse to come with the coro­n­avirus pan­dem­ic like­ly to lead to many more firms fail­ing with their pen­sion funds in the red, so it is in the nick of time that the Pen­sions Reg­u­la­tor has been grant­ed these exten­sive pow­ers. 

Could the cure be worse than the dis­ease? Employ­ers and their advis­ers could now face crim­i­nal sanc­tions for wrong­do­ing based on what they should have known, but 20:20 vision in hind­sight is nigh on impos­si­ble. This will lead to a boom time for pen­sion lawyers as employ­ers will be fear­ful to take a step with­out their advice. Legal fees could go through the roof. 

But only a very few pen­sion trustees have faced a jail sen­tence so change here seems unlike­ly. Much depends on how the reg­u­la­tor uses its new pow­ers with fur­ther guid­ance expect­ed this year. 

Dauntingly difficult dashboard task

Of sem­i­nal impor­tance is the long-await­ed dash­board which takes one step near­er to fruition. Left unchecked, by 2035 there may be 27 mil­lion small pen­sion pots, accord­ing to research by NOW: Pen­sions and the Pen­sions Pol­i­cy Insti­tute, many lost and for­got­ten. The pen­sions dash­board will rem­e­dy this by dis­play­ing everyone’s pen­sions in one place. 

“The act is an impor­tant mile­stone,” says Chris Cur­ry, prin­ci­pal of the Pen­sions Dash­board Pro­gramme at the Mon­ey and Pen­sions Ser­vice, “as it unlocks the next stage of law-mak­ing around dash­boards, which will make it com­pul­so­ry for pen­sion schemes and providers to con­nect to the dash­boards.”

But it is also daunt­ing­ly dif­fi­cult. Charles Cowl­ing, chief actu­ary at Mer­cer, notes: “High­ly com­plex pen­sion data is stored on old sys­tems, which are often unre­li­able and not stan­dard­ised, and there are no agreed stan­dards for ben­e­fit cal­cu­la­tions or even con­sis­ten­cy of ter­mi­nol­o­gy. Even state pen­sion records are unre­li­able. It could take many years before we have sys­tems that can reli­ably access pen­sion data in a stan­dard form and then con­vert it into the dash­boards envis­aged for mem­bers.” 

The vol­ume of data involved is going to be eye-water­ing and a big risk in terms of care­ful man­age­ment. Tyron Potts, asso­ciate and head of pen­sions research at Bar­nett Wadding­ham, says: “Secu­ri­ty of this data will be para­mount and deliv­ery will be com­plex, requir­ing col­lab­o­ra­tion between hun­dreds of dif­fer­ent providers and pen­sion schemes.”

Pub­lic ser­vice schemes face a par­tic­u­lar chal­lenge. Sir Steve Webb, for­mer pen­sions min­is­ter and now part­ner at LCP, warns: “Many of them already have record-keep­ing issues. The McCloud judg­ment on age dis­crim­i­na­tion could cre­ate a huge amount of work; pub­lic ser­vice schemes are already indi­cat­ing it could be years before they are in a posi­tion to devote resources to sup­ply­ing data to a dash­board.”

Any­one who expects an all-singing, all-danc­ing dash­board with com­pre­hen­sive infor­ma­tion by 2023, and with a sys­tem akin to open bank­ing, will be dis­ap­point­ed, for dif­fer­ent types of scheme will come online at dif­fer­ent times. The fear is that, with incom­plete infor­ma­tion, con­sumers will not trust the dash­board and will not use it. 

Cli­mate change is also creep­ing up the agen­da, with the likes of Sir David Atten­bor­ough and Love Actu­al­ly direc­tor Richard Cur­tis push­ing the £6‑trillion pen­sion indus­try with its mas­sive buy­ing pow­er to go green. The new leg­is­la­tion recog­nis­es this with an empha­sis on schemes to con­sid­er the cli­mate change impact of the invest­ments they make on behalf of mem­bers and pub­lish infor­ma­tion on how this has been achieved.

Final­ly, the Pen­sion Schemes Act also opens the door for Roy­al Mail’s new-style col­lec­tive defined con­tri­bu­tion scheme. Watch this space.