How to prepare for the Pension Schemes Act

Fur­ther pro­vi­sions of the Pen­sion Schemes Act 2021 are set to come into force in 2022, aimed at pro­tect­ing the retire­ment funds of savers in defined ben­e­fit (DB) pen­sion schemes. What will this mean for trustees, employ­ers and savers, and how can they pre­pare?

The new noti­fi­able events regime is the most press­ing agen­da item for scheme trustees and employ­ers in their role as spon­sor of DB pen­sion schemes.

A DB scheme offers employ­ees a retire­ment fund based on the num­ber of years they have been a mem­ber of their employer’s pen­sion scheme and their final or aver­age salary. A defined con­tri­bu­tion (DC) scheme offers savers a retire­ment fund based on the accru­al of the con­tri­bu­tions they make dur­ing their employ­ment, togeth­er with con­tri­bu­tions made by their employ­er.

From 6 April 2022, the regime requires spon­sor­ing employ­ers of DB schemes to noti­fy The Pen­sions Reg­u­la­tor (TPR) and scheme trustees when a ‘deci­sion in prin­ci­ple’ is made about cer­tain cor­po­rate trans­ac­tions: for exam­ple, the sale of a mate­r­i­al pro­por­tion of its busi­ness or assets.

This aims to alert TPR to cor­po­rate activ­i­ty that could see an employ­er call on the Pen­sion Pro­tec­tion Fund (PPF) should they become insol­vent, or when their scheme’s fund­ing lev­el falls below the PPF’s buy-out lev­el.

Employ­ers must ensure they ful­ly under­stand the def­i­n­i­tion of ‘deci­sion in prin­ci­ple’, when it applies and how to approach prospec­tive cor­po­rate deals accord­ing­ly.

“At the deci­sion in prin­ci­ple stage, assum­ing it’s just maybe heads of terms or per­haps a ver­bal agree­ment, that is usu­al­ly con­fi­den­tial and the employ­er wouldn’t nec­es­sar­i­ly want to tell the trustees, so [the reg­u­la­tions are] requir­ing the employ­er to inform the trustees at an ear­li­er stage, which could be an issue,” says Car­olyn Saun­ders, head of pen­sions at Pin­sent Masons.

Broad net

If employ­ers fall foul of the new noti­fi­able events regime they could risk a wider range of employ­ees being on the receiv­ing end of TPR’s new crim­i­nal pow­ers. The pow­ers can be used for ‘any per­son’ found to have put savers’ pen­sions at risk. This lia­bil­i­ty will extend to third par­ties involved in a cor­po­rate deal, includ­ing lenders and pro­fes­sion­al advis­ers.

“One of the chal­lenges is that the net of peo­ple [who could be held liable] is so broad and may affect peo­ple not involved with a scheme on a day-to-day basis,” says Leah Evans, pen­sions board chair at the Insti­tute and Fac­ul­ty of Actu­ar­ies.

Pen­sion scheme trustees and man­agers should focus on rais­ing aware­ness through­out their organ­i­sa­tion about the types of activ­i­ty on which TPR will expect to be noti­fied. They should encour­age employ­ees to ask ques­tions at the out­set of any cor­po­rate trans­ac­tion, par­tic­u­lar­ly board mem­bers, chief finan­cial offi­cers and trea­sury and cor­po­rate restruc­tur­ing teams.

Mark Engel­bret­son is head of pen­sions at Net­work Rail, which oper­ates two open DB schemes. “For me, it is all around chal­leng­ing my rel­e­vant advis­ers, admin­is­tra­tors, scheme actu­ary, invest­ment con­sul­tants and scheme lawyer when going through any project and look­ing at changes or updat­ing process­es that we work on togeth­er, to ensure that we cov­er absolute­ly every piece of ground that we pos­si­bly can and stress test dif­fer­ent sce­nar­ios,” he says.

Funding code

Trustees of DB schemes are also wait­ing on the pub­li­ca­tion of TPR’s sec­ond con­sul­ta­tion on its new DB fund­ing code, which has been delayed until late sum­mer. The first con­sul­ta­tion out­lined plans for a scheme-spe­cif­ic fund­ing regime, which enables scheme trustees to opt for a ‘fast-track’ route if their scheme val­u­a­tion is com­pli­ant with TPR’s code guide­lines. There is a ‘bespoke’ route for trustees who can­not or choose not to com­ply with the for­mer route. In such cas­es, sup­port­ing evi­dence would be required to illus­trate how trustees plan to man­age any addi­tion­al risk to their scheme.

There is hope that the sec­ond con­sul­ta­tion will address the cur­rent lack of dif­fer­en­ti­a­tion between open and closed DB schemes, giv­en that open schemes are like­ly to have a dif­fer­ent invest­ment strat­e­gy with a greater risk appetite.

“The fact is that new mon­ey and new con­tri­bu­tions and mem­bers are still com­ing into a num­ber of DB pen­sion schemes,” Engel­bret­son says.

Scheme trustees and spon­sor­ing employ­ers can pre­pare by ensur­ing they agree on a long-term scheme fund­ing strat­e­gy that all stake­hold­ers can buy into.

A new pen­sion scheme known as the col­lec­tive defined con­tri­bu­tion (CDC) scheme is expect­ed to be intro­duced around the same time as the pub­li­ca­tion of TPR’s fund­ing code con­sul­ta­tion. CDC schemes should come into force on 1 August 2022 and pro­vide mem­bers and employ­ers with fixed con­tri­bu­tion rates, which are invest­ed col­lec­tive­ly, thus pool­ing invest­ment and longevi­ty risks.

Roy­al Mail has announced plans to imple­ment its own CDC scheme, known as the Roy­al Mail Col­lec­tive Pen­sion Plan, which would make it the first UK com­pa­ny to do so.

Climate change regulations

From 1 Octo­ber 2022, trustees of new autho­rised CDCs will be sub­ject to the new Occu­pa­tion­al Pen­sion Schemes (Cli­mate Change Gov­er­nance and Report­ing) Reg­u­la­tions 2021, along with trustees of DB schemes with assets of more than £1bn.

The reg­u­la­tions require trustees to iden­ti­fy, man­age and dis­close in an annu­al report all cli­mate-relat­ed risks and oppor­tu­ni­ties affect­ing their pen­sion funds.

In the doc­u­ment known as the Task­force on Cli­mate-relat­ed Finan­cial Dis­clo­sures (TCFD) report, trustees are required to dis­close infor­ma­tion about their pen­sion scheme gov­er­nance, strat­e­gy and risk man­age­ment, along with their met­rics and tar­gets; these should be pub­lished with­in sev­en months of the end of a scheme year.

The reg­u­la­tions, which entered force for trustees of larg­er DB pen­sion schemes with assets of £5bn and above and autho­rised mas­ter trusts on 1 Octo­ber 2021, are designed to bet­ter iden­ti­fy, assess and man­age cli­mate risk, which may direct­ly or indi­rect­ly affect mem­bers’ funds.

Fur­ther prepa­ra­tion is required for the phased imple­men­ta­tion of pen­sions dash­boards, which will be intro­duced from April 2023 through to 2026. The dash­boards aim to pro­vide savers with access to their mul­ti­ple pen­sions sav­ings, includ­ing their State Pen­sion, in one place online.

This is like­ly to be wel­come news for those involved in debates over the ade­qua­cy of savers’ retire­ment funds amid con­cerns about the num­ber of com­pa­nies that have moved from DB to DC pen­sion schemes for their work­force.

“If we’ve got a big cohort com­ing to retire who can’t afford to retire, I think over­all there’s going to be a greater focus again on ade­qua­cy, what com­pa­nies pro­vide and per­haps where the bal­ance should sit between pri­vate and per­son­al and state pro­vi­sion,” Evans says.