Pensions Law Is Changing On 1 October 2021 – Are You Ready? – Employment and HR

On 1 October 2021, key provisions of the Pension Schemes Act
2021 (PSA 2021) come into force. Trustees and sponsors of
occupational pension schemes will be under a new regulatory regime
as The Pension Regulator’s (TPR) powers are extended. In
addition, trustees of certain schemes will need to comply with new
requirements on climate change risk reporting and governance, and
defined contribution value for member assessments.

This insight sets out the 
key points for trustees and for 
scheme sponsors, and then provides more detail on the 
key 1 October 2021 changes.

Key points for trustees

1. TPR will gain additional powers to regulate
occupational pensions

From 1 October 2021, TPR’s powers will be materially
strengthened. A broad range of new criminal offences and civil
penalties will come into force, enabling TPR to meet its
aim of being ‘clearer, quicker and tougher’. Powers in
relation to sponsoring employers are broadened with:

• new criminal offences for avoidance of an employer debt and
  conduct risking accrued scheme benefits; and




• a new contribution notice regime.

In addition, TPR will be able to obtain more
information via broader investigatory powers backed by criminal
sanctions and financial penalties for non-compliance. Fines will
also be introduced for failure to comply with the notifiable events
regime.

More detail on TPR’s additional powers is outlined
 in the section below on strengthening TPR’s powers
to regulate pension schemes. Our earlier article on the response to the consultation on strengthening
the pension regulator’s powers also provides further
background.

2. Climate risk reporting and governance requirements will
start to be introduced

New climate risk-related governance and reporting requirements
will apply from 1 October 2021 to trustees of larger occupational
pension schemes (i.e. those with assets of £5 billion and
above, all master trusts and (when any are introduced) collective
defined contribution (DC) schemes). The requirements will then
apply to schemes with assets of £1 billion and above from 1
October 2022.

Further detail on TPR’s additional powers is summarised
in the section below 
on climate change risk reporting and governance
requirements.

3. New value for members requirements will apply to certain
Occupational Pension Schemes

On 1 October 2021, various provisions of the PSA 2021 relating
to money purchase benefits will come into force. From the first
scheme year that ends after 31 December 2021, the trustees of
certain schemes will have to carry out a detailed assessment of how
their scheme delivers value for members. The new requirements will
apply to DC and hybrid (i.e. DB and DC)
schemes that have:

• total assets of less than £100 million; and




• been operating for three or more years.

See our commentary below on 
new value for member requirements applying to certain occupational
pension schemes for more insight.

Key action points for employers

1. New criminal offences and fines will apply in relation to
sponsor activity

The PSA 2021 creates a broad range of new criminal offences and
civil penalties. Two of the most significant extensions
of TPR’s powers include the creation of two new criminal
offences:

• avoidance of employer debt; and




• conduct risking accrued scheme benefits.

The penalty on conviction of either offence includes an
unlimited fine and/or imprisonment for up to seven years.

See point one under our section on strengthening TPR’s
powers to regulate pension schemes for more detail on the
new criminal offences and civil penalties.

2. Two new grounds for TPR to issue a contribution
notice will be introduced

From 1 October 2021, TPR will have two new grounds on
which it can issue a section 38 contribution notice:

• the employer resources test; and




• the employer insolvency test.

A new criminal offence of failing to comply with a section 38
contribution notice will apply from 1 October 2021. In addition, a
new financial penalty regime will apply for failures to comply.

More detail on the new contribution notice regime can be found
under 
point two of our section on strengthening TPR’s powers to
regulate pension schemes.

3. TPR will gain broader investigatory powers

TPR will be granted a range of new powers and sanctions
regarding its ability to:

• collate and request information from regulated schemes and
  employers; and




• punish those who fail to comply with its notices and
  directions.

Further details of TPR’s new investigatory powers is
provided below under 
point three of our section on strengthening TPR’s powers
to regulate pension schemes.

4. New penalties will apply for non-compliance with the
notifiable events regime

A new notifiable events regime will be in place from 1 October
2021. From this date, TPR will have additional powers to
ensure compliance with the existing notifiable events regime.

The notifiable events regime will also be extended in scope.
Regulations placing new notification obligations on parties where
certain corporate transactions involve DB pension schemes
are expected to come into force on 6 April 2022.

To learn more about the new criminal offences and civil
penalties applying for non-compliance with the notifiable events
regime, 
see point four under the section about strengthening TPR’s
powers.

For more detail on the new notifiable events regime, read our insight ‘Will your corporate activity
be captured by the new pensions notification
requirements?’.

In more detail

Strengthening TPR’s powers to regulate
pension schemes

Under the PSA 2021, TPR’s powers to regulate
occupational pension schemes will be materially strengthened. The
new powers are intended to help TPR meet its aim of being
‘clearer, quicker and tougher’. The PSA 2021 and underlying
regulations provide the framework for a more interventionist style
of regulation. TPR’s new powers are grouped in four
areas.

1. Criminal sanctions and financial
penalties for avoidance of an employer debt and conduct risking
accrued scheme benefits

The PSA 2021 creates a broad range of new criminal offences and
civil penalties. Two of the most significant extensions
of TPR’s powers include the creation of two new criminal
offences:

• avoidance of employer debt; and




• conduct risking accrued scheme benefits.

The penalty on conviction of either offence includes an
unlimited fine, imprisonment for up to seven years or both.

TPR has issued a draft criminal sanctions policy which
sets out how it intends to investigate and prosecute the new
criminal offences contained in the PSA 2021. Most importantly for
trustees are:

• an explanation of TPR’s view of the ‘reasonable
  excuse’ defence to the two new offences; and




• examples of the factors TPR would consider
  significant in relation to decisions on prosecuting under the new
  offences.

A final version of this policy is expected to come into force on
1 October 2021.

2. New grounds for TPR to issue
a contribution notice

TPR’s contribution notice regime will be extended on 1
October 2021. From this date, TPR will have two new
grounds on which it can issue a section 38 contribution notice:

• the employer resources test; and




• the employer insolvency test.

A new criminal offence of failing to comply with a section 38
contribution notice will apply from 1 October 2021. In addition, a
new financial penalty regime will apply for failures to comply.

TPR has issued a draft update of its code of practice on
contribution notices (Draft Code 12: Contribution Notices). Draft
Code 12 sets out the circumstances in which TPR expects
to issue a contribution notice when it believes that:

• the material detriment test (which is one of the current
  grounds for TPR to issue a contribution notice);




• the employer insolvency test; or




• the employer resources test has been met.

In addition, TPR has issued a consultation response to
its consultation on strengthening its powers (Strengthening The Pension Regulator’s Powers:
Contribution Notice and Information Gathering Powers Regulations
2021) which provides more context for the widening of its
powers in relation to contribution notices.

3. Broader investigatory
powers

TPR will be granted a range of new powers and sanctions
regarding its ability to:

• request and collate information from regulated schemes and
  employers; and




• punish those who fail to comply with its notices and
  directions.

The new powers will come into effect on 1 October 2021 and
include:

• a power for TPR to summon certain individuals to
  attend an interview. This will apply to people to whom the current
  provision of information requirements apply;




• a broader power to inspect premises, including premises where
  documents are kept or administration is carried out relating to an
  employer of a scheme;




• a new fixed and escalating penalty fine regime for
  non-compliance with provision of information requirements; and




• new penalties for knowingly or recklessly providing false or
  misleading information to either TPR or trustees /
  managers of schemes.

TPR has issued a consultation response to its consultation
on strengthening its powers (Strengthening The Pension Regulator’s Powers:
Contribution Notice and Information Gathering Powers Regulations
2021), which provides more context for the widening of its
investigatory powers.

4. Penalties for non-compliance with the
notifiable events regime

A new notifiable events regime will be in place from 1 October
2021. From this date, TPR will have additional powers to
ensure compliance with the existing notifiable events regime.

Knowingly or recklessly providing TPR with information
under the notifiable events regime that is “false or
misleading in a material particular” will be punishable by a
fine or by imprisonment for up to two years.

More importantly for scheme sponsors, new notifiable events in
relation to certain corporate transactions will be in place from 6
April 2022.

Notification of certain corporate activities
to TPR

Under the new notifiable events regime, sponsoring employers
will be required to notify TPR when a ‘decision in
principle’ is made in relation to certain key corporate
transactions. These include:

• sale of a material portion of the sponsor’s business or
  assets;




• granting security over assets above a certain value; and




• certain corporate restructuring (e.g. changes in who controls
  the sponsoring employer).

Notice and statement obligations for scheme
employers

There will be a new duty on employers to give notices and
statements to TPR that set out:

• the implications for a DB scheme of certain corporate
  events; and




• how any risks to the scheme will be mitigated.

The notice and statement will be required at a later point in a
corporate transaction than the notifiable event notification. This
will apply when:

• there is greater certainty as to whether the transaction is
  going ahead;




• the nature of the transaction; and




• the implications of the transaction for the scheme.

For more detail on the new notifiable events regime, read our insight ‘Will your corporate activity
be captured by the new pensions notification
requirements?’.

Climate change risk reporting and governance
requirements

Who will the new legal requirements on climate change
risk reporting and governance apply to?

The new requirements will be phased in. The first group to be
subject to the new requirements are the trustees of the UK’s
largest pension schemes:

• those with relevant assets of £5 billion or more;




• master trusts; and




• authorised collective money purchase schemes.

These schemes are required to comply from 1 October 2021. From 1
October 2022, the requirements will also apply to trustees of
schemes with £1 billion or more in relevant assets.

What are the new legal requirements?

The new requirements include:

• Governance – trustees will be required to
  establish and maintain oversight of climate-related risks and
  opportunities relevant to their scheme.




• Strategy – trustees must, on an ongoing
  basis, identify and assess the impact of climate-related risks and
  opportunities which they consider will have an effect on the
  scheme’s investment strategy and (where the scheme has one) its
  funding strategy.




• Scenario analysis – trustees must, as far
  as they are able, undertake scenario analysis that assesses the
  impact climate change will have on:
  

  • the scheme’s assets and liabilities; and

  
  

  • the resilience of the scheme’s investment strategy and
    (where it has one) funding strategy.

The scenario analysis should cover at least two global average
temperature increase scenarios. One of these scenarios must
correspond to a global average temperature rise of between
1.5°C and 2°C on pre-industrial levels.

• Metrics and targets – trustees must
  select a minimum of three metrics for their scheme:
  

  • absolute emissions metric – giving the total greenhouse gas
    emissions of the scheme’s assets;

  
  

  • emissions intensity metric – giving the total greenhouse gas
    emissions per unit of currency invested by the scheme; and

  
  

  • additional climate change metric – one other metric relating to
    climate change.




• Trustee knowledge and understanding -
  trustees should have sufficient knowledge and understanding to
  enable them to meet their climate change governance
  requirements.




• Reporting – trustees must publish a
  report which will cover how the trustees have complied with the
  requirements set out above. The report must be produced within
  seven months of the end of the relevant scheme year and must be
  published on a publicly available website and be accessible free of
  charge.

For more information, click here for the Government’s
consultation response ‘Taking action on climate risk: improving
governance and reporting by occupational pension schemes (July
2021)’.

TPR’s draft guidance on governance and reporting of
climate-related risks and opportunities

TPR has issued two documents in relation to climate risk
reporting and governance:

It is expected that final versions of these documents will be
issued shortly and come in to force on 1 October 2021.

The Draft Guidance

Areas covered by the Draft Guidance include:

• Governance – trustees should add
  climate-related risks and opportunities to the remit and terms of
  reference of one or more sub-committee. They should also build
  climate change into service provider and adviser contracts.




• Strategy – trustees should identify the
  short, medium and long-term time periods suitable for the scheme,
  considering the:
  

  • type of benefits payable;

  
  

  • membership profile;

  
  

  • period over which member payments will be made and how these
    might all develop and evolve.

Trustees should also speak with the scheme’s employer to
find out how the employer assesses climate-related risks and
opportunities over similar time periods.

• Scenario analysis – trustees should
  determine when to conduct scenario analysis, carry out the analysis
  and document the resilience of the scheme.




• Risk management – trustees should
  identify the climate-related risks and opportunities and assess
  their impact, developing a climate risk and opportunity dashboard
  to include in the regular reporting cycle. If there is a funding
  strategy the dashboard should include a section on funding and
  covenant.




• Climate-related risks and opportunities -
  these should be included in scheme documentation. This might
  include updating the investment beliefs, including climate risks
  and opportunities in the risk register, and developing new policies
  and frameworks, if necessary. For example, there might be a
  dedicated set of climate principles or a climate-risk management
  framework.




• Publishing a report – TPR gives
  practical guidance on how the report should be drafted and what it
  should contain.

The Draft Appendix

The Draft Appendix sets out the penalties
that TPR anticipates applying in the event of a breach of
the new duties.

TPR anticipates all schemes would receive the minimum
penalty of £2,500 for a breach of the new duties. Any
consecutive penalty will normally be at least £5,000 to
reflect the seriousness with which TPR views repeated or
ongoing breach of legal requirements. Where the scheme has a
professional trustee in place, the minimum penalty will generally
be £5,000 (as TPR expects higher standards from
professional trustees).

In relation to discretionary penalties, the amount of the
monetary penalty will generally depend on the persons concerned,
band level and any aggravating or mitigating factors.

New value for members requirements applying to
certain Occupational Pension Schemes

On 1 October 2021, various provisions of the PSA 2021 relating
to money purchase benefits will come into force. The most onerous
requirements will apply to relevant DC occupational pension schemes
with under £100 million of assets and which have been
operating for three or more years.

From the first scheme year that ends after 31 December 2021, the
trustees of such schemes will have to carry out a detailed
assessment of how their scheme delivers value for members.

Hybrid schemes (i.e. those that provide
both DB and DC benefits) are also in scope, but
only if total scheme assets are below
£100 million. In such hybrid schemes, only
the DC element will be subject to the requirement to
carry out a value for members assessment.

A value for members assessment involves:

• a comparison of reported costs and charges and fund performance
  against three other schemes; and




• consideration of key governance and administration
  criteria.

Where the comparison does not demonstrate good value for members
against the comparator schemes, trustees should consider winding up
and transferring members to a scheme that does offer good
value.

The value for members assessment must be recorded in the
Chair’s statement and published on a publically accessible
website. The assessment also needs to be reported
to TPR via the annual scheme return. Trustees concluding
that the scheme does not offer value for members must state in the
return whether they propose to transfer members to another scheme
and wind up and if not, why not, as well as what improvements will
be made in that event. A report to TPR in advance of the
scheme return will also be required if the value for members
assessment determines that the scheme does not provide value for
members.

What’s next for trustees and sponsors?

The PSA 2021 represents the biggest change to the regulation of
occupational pension schemes since the Pensions Act 2004. Trustees
and sponsors should:

• ensure that they understand the scope of TPR’s new
  powers. This may include training for trustees and key decision
  makers covering TPR’s new powers and the broader range of
  criminal sanctions and financial penalties that will apply from 1
  October 2021;




• review governance processes to ensure that they reflect the
  requirements of the new regime. A robust governance framework will
  help trustees and sponsors to manage and mitigate risks of
  breaching the new regulatory regime;




• take professional advice – the PSA 2021 marks a step change in
  the regulation of occupational pension schemes. With the prospect
  of tough criminal sanctions and financial penalties for
  non-compliance, sponsors and trustees should seek professional
  advice to help navigate the new regime;




• maintain and, if necessary, improve the documentation and audit
  trail for decision making, including setting out the issues
  considered, the advice taken and the decision
  made. TPR has made it clear that it expects sponsors to
  back decisions in relation to material corporate transactions with
  necessary and relevant information. Such information will be in
  scope of TPR’s investigatory powers; and




• review and, where necessary, improve the channels of
  communication and the flow of information between scheme sponsors
  and trustees. Early engagement between trustees and sponsors has
  always been encouraged and will become even more important in
  respect of corporate activity that is within scope of the new
  regulatory regime.

Read the original article on GowlingWLG.com

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