The recently published Pension Schemes Bill provides for major extensions of the Pensions Regulator's powers, including the creation of new criminal offences which are very broad in scope and could potentially catch a wide range of people. Whilst the Bill is not set to become law this side of the general election, it seems likely that a future government will seek to enact the measures contained in the Bill, many of which are likely to command cross-party support.
The Bill also includes important provisions on trustee funding and investment strategy, members' right to a transfer value, and the establishment of a "pensions dashboard".
The Bill does not include any changes to the legislation governing GMP conversion although the DWP's guidance issued in April 2019 (see our e-bulletin) suggested that changes were being considered.
Pensions Regulator powers
As expected following the Government's consultation on strengthening the Pension Regulator's powers, the Bill includes wider so called "moral hazard" powers and new information gathering powers. It also introduces new powers for the Regulator to impose penalties of up to £1m and new criminal offences which can apply to any person (including banks and other funders who are not associated or connected with the scheme employer) and carry an unlimited fine or a prison sentence of up to 7 years. Parties involved with companies that sponsor defined benefit schemes should make themselves familiar with these as there will be circumstances where the Regulator will be able to look at conduct before the Bill becomes law when it exercises the new powers.
New "moral hazard" powers tests
The Bill introduces the following two new grounds on which the Regulator may issue a contribution notice under its "moral hazard" powers (the Regulator's powers to require employers and persons connected or associated with them to provide additional scheme funding):
- an "employer insolvency test" where the Regulator considers that an act or omission has materially reduced the amount which the scheme would be likely to recover in the event of a hypothetical employer insolvency had a section 75 debt (ie a debt under the statutory employer debt regime) fallen due; and
- an "employer resources test" where the Regulator considers that an act or omission reduced the employer's resources and the reduction is material relative to the debt which would be due under section 75 of the Pensions Act 1995 if it were triggered immediately after the act or omission.
A defence to a contribution notice is available if a person can show that he took all reasonable steps to eliminate or minimise the potential for the act or omission to have such an effect. All parties should ensure that the availability of defences is considered and minuted to improve the prospects of successful defence.
It appears that the wording of the Bill would allow the Regulator to exercise its wider powers by reference to acts or omissions which occurred before the new tests came into force.
New information gathering powers
The Bill includes provisions to extend the Regulator's information gathering powers. These include:
- provision for regulations to extend the current "notifiable events" regime, requiring information to be provided in advance, more detail to be given and for scheme trustees to be notified at the same time as the Regulator;
- a new power for the Regulator to compel attendance of any person at an interview;
- broader powers to allow the Regulator to enter premises for the purposes of investigating whether there are grounds for the Regulator to exercise its moral hazard powers.
New power to impose financial penalties of up to £1 million
The Bill contains a new power allowing the Regulator to impose penalties of up to £1 million for various breaches of pensions legislation, including failure to comply with the notifiable events regime and for knowingly or recklessly providing false or misleading information to the Regulator or, in some circumstances, to the scheme trustees.
New criminal offences
The Bill provides for the creation of a number of new criminal offences, including some which are very broad, ie avoiding/reducing a debt on the employer under section 75 of the Pensions Act 1995 without reasonable excuse or acting without reasonable excuse in a way which detrimentally affects the likelihood of accrued scheme benefits being received. The penalties include fines and imprisonment for up to seven years.
The Regulator can pursue any person (except insolvency practitioners) which could include private equity houses or banks.
The Bill introduces a requirement for trustees to put in place a written long term funding and investment strategy setting out the funding level they expect the scheme to have achieved by the "relevant date" (or dates) and the investments the trustees intend the scheme to hold on the relevant date(s). The Pensions Regulator will have powers to direct changes to the funding and investment strategy. Much of the detail, including the definition of "relevant date", has been left to regulations. The Pensions Regulator is due to consult on a new code of practice on the funding of defined benefit schemes. That consultation is likely to give us a better idea of the approach that the Regulator will expect from trustees in relation to scheme funding.
The Bill contains a power to make regulations requiring trustees to make extra checks, such as requiring evidence of employment, before paying a transfer value in respect of a member. The provisions appear to be aimed at preventing scams where members are persuaded to transfer funds from a legitimate scheme to a scheme that is being used as a vehicle for a scam.
The Bill provides for the establishment of a statutory framework for a "pensions dashboard" which will allow members to view details of all their pension arrangements by logging on to a single source. The Bill leaves much of the detail to regulations, but does allow for regulations to require schemes to provide information for the pensions dashboard.
Collective money purchase schemes
The Bill contains provisions to establish the legal framework for the establishment of "collective money purchase" schemes under which targeted benefits can be periodically adjusted to take into account the value of scheme assets held. Such schemes will have to be authorised and supervised by the Pensions Regulator under a regime similar to that already in force for master trusts.