We take a look at eight key pensions developments that employers and scheme trustees need to plan for in the coming year.
1. Pensions Regulator's criminal sanction and extended moral hazard powers (DB schemes)
From 1 October 2021, the Pensions Regulator's new criminal sanction and extended moral hazard powers came into force. The extension to the moral hazard powers will allow the Pensions Regulator (TPR) to required additional pension scheme funding from employers and their group in a wider range of circumstances, including corporate activity that results in a material reduction to an employer's resources. For most businesses, we expect the moral hazard power changes to be a bigger issue than the criminal sanctions (which TPR intends to use in only the most serious cases). The changes have lowered the bar for TPR to issue a contribution notice, and the changes to the notifiable events regime (see below) will mean that more transactions come to the attention of TPR and the scheme trustees at an earlier stage.
Action point: Businesses will need to ensure their boards are aware of these extended powers and the practical impacts on day-to-day activity and this may require specific training. Additional governance processes may need to be put in place to ensure due consideration is given to the pensions implications of a corporate decision and (if applicable) legal advice to support that decision is obtained. Where mitigation (eg additional contributions and/or security) is provided in relation to corporate activity that may adversely impact the scheme this needs to be documented carefully and with an eye to risks of this being reviewed/revisited in the future. As a matter of trusts law, there are limits on how far trustees can agree to restrict their future decisions ("fetter their discretion" in legal jargon). It's also possible that trustees will reach agreement with the employer on mitigation only to find that TPR tells them they should be asking for more. From our own experience of mitigation negotiations in high value transactions involving TPR, we can provide strategic advice for businesses on how best to document any agreement on mitigation.
2. Notifiable events changes (DB schemes)
The government is planning to make major changes (probably from 6 April 2022) to the "notifiable events" regime which requires certain corporate activity to be notified to TPR. Two new notifiable events are being added, ie a decision in principle by a scheme employer:
- to sell a "material proportion" (broadly 25%) of its business or assets; or
- to grant or extend a "relevant security" (ie broadly one that comprises more than 25% of its consolidated revenues or gross assets) where the security will rank ahead of the pension scheme (subject to a limited exemption for refinancings).
Additionally, a decision to sell a scheme employer will have to be notified at the "decision in principle" stage. In each case, more information will have to be provided to TPR as the transaction progresses.
Action point: Businesses should make sure they understand which events need to be notified to TPR when, and what follow up information needs to be provided. This may require specific training or checklists being put in place to capture this as part of standard governance processes and advice to be sought on the content of any notification. Scheme trustees may seek to put in place, or update any existing, information sharing protocol with the business to ensure there is an increased flow of early information sharing about corporate activity which may be caught by TPR's extended powers or as a notifiable event. We can assist with such documents and advise on what we are seeing across our client base in this regard.
3. New transfer values regime (DB and DC schemes)
New transfer value rules designed to combat pension scams came into force on 30 November 2021. Our experience is that most trustees are still getting to grips with the new rules, which were only published in final form shortly before they came into force. Processing transfer values is something that trustees normally leave to scheme administrators, but liability for the way in which transfer values are handled rests with the trustees. The new rules allow trustees a lot of discretion regarding what checks they make before processing a transfer value.
Action point: Trustees should engage with their scheme administrators to check they have updated processes and communications to members and to agree a policy on how the rules are implemented. Trustees may wish to seek legal advice to understand how their administrators proposed approach aligns with the legal requirements and to help pinpoint key areas of risk for the Trustees and the options to mitigate this
4. Scheme consolidation (separate developments for DC and DB schemes)
New requirements for DC schemes to carry out "value for members" (VFM) assessments will start to bite in 2022. DC schemes that have less than £100 million in total assets (and have been operating for three or more years) will be required to compare their scheme with at least three large schemes. If trustees conclude their scheme doesn't provide VFM, they will generally be expected to wind it up and transfer its assets and liabilities to a larger scheme. Trustees will have to complete the VFM annually and report on it as part of the chair's statement and in the annual return. The first VFM assessment is required for the first scheme year ending after 31 December 2021. In a recent call for evidence the Government has said that it thinks there are too many DC schemes and is looking at how to incentivise schemes with assets of between £100 million and £1 billion to consolidate.
Action point: Trustees of affected schemes should put in place plans to comply with the VFM assessment. Businesses operating DC schemes should consider the costs of the VFM assessment and may wish to consider their longer term pensions strategy and seek advice on the alternative options for DC provision which avoid the VFM assessments e.g. consolidating their DC scheme into a DC master trust.
In a separate DB-related development, Clara-Pensions has become the first "superfund" (a consolidator vehicle for DB pensions) to complete the Pensions Regulator's assessment process. For trustees of schemes closed to future accrual who are looking towards the "endgame", transfer of the scheme's assets and liabilities to a superfund is one option to consider, though TPR has made clear that it does not consider transfer to a superfund to be an appropriate endgame for schemes that are likely to be able to buy out benefits with an insurance company in the next five years.
Action point: Trustees and businesses involved in "endgame" planning should consider whether transfer to a superfund is an appropriate objective.
5. GMP equalisation: transfer value top ups (DB schemes)
GMP equalisation has been on our "key developments" list for the past few years, but we are now seeing significant progress being made on this, particularly among schemes who need to get the issue dealt with in order to move to buy out. Over the past year we've been advising a number of trustee boards on completing these exercises and on the tricky issue of paying top ups in respect of past transfer values (which very few schemes have tackled to date). We've found that a willingness on the part of employers to provide specific indemnity cover can give the trustees the confidence to take a pragmatic approach to issues, bearing in mind that the individual top ups payable often involve small amounts and the costs of tracing individuals and receiving schemes and agreeing a process for the payment to be made can outweigh the costs of the top ups due.
Action point: Employers and trustees should work together to agree an equalisation approach that is pragmatic and avoids running up expenses that are disproportionate to the amounts involved. We have insight on these issued based on our work with schemes buying out that can help all parties cut through some of the difficult issues when trying to agree a way forwards.
6. New scheme funding requirements (DB schemes)
Although the original timetable for the new scheme funding regime has slipped, new scheme funding regulations are now expected to be published for consultation in Spring 2022. The Pensions Regulator's second consultation on its new scheme funding code is expected to be published in Summer 2022. Once the measures are in force, trustees will be required to put in place a long-term funding and investment strategy which must be agreed with the scheme employer.
Action point: Once the consultations on the regulations and new code are published, employers and trustees will need to consider how these may impact their scheme's current funding strategy.
7. Requirement for "own risk assessment" under TPR's single code of practice (DB and DC schemes)
The Pensions Regulator's new single code of practice is expected to come into force in 2022 (though not before the summer). Under the new code, the TPR expects schemes to carry out a documented "own risk assessment" (ORA) covering the trustees' risk management policies in relation to various areas including continuity planning, governance and investment. The draft code says that an ORA should be carried out within one year of the new code coming into force and then annually.
Action point: Trustees should plan for the need to prepare an ORA once the final form code is published. This is likely to mean carrying out gap analysis to understand which areas need to be prioritised taking into account your scheme's circumstances and its current governance policies and arrangements.
8. New rules on international data transfers (DB and DC schemes)
Post-Brexit there are changes afoot in relation to the documentation that needs to be in place in order to be compliant from a data protection perspective where scheme data is transferred internationally to countries outside the EEA. We expect the ICO to publish updated documents relating to this later this year. This will only be relevant for schemes where scheme data is transferred overseas, most likely this could apply where the scheme administrator performs some tasks from overseas offices.
Action point: Trustees should check with their scheme administrator to confirm if their scheme data is transferred internationally (or check any data map they might have in place documenting this) and be aware they may need to seek advice and update the data protection provisions that apply to those international transfers. This may require a variation to their administration agreement or some other addendum being put in place by the administrator.