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On 11 February 2021, the Pension Schemes Act 2021 (the Act) was given royal assent, setting out a framework for several major changes that will certainly be of interest to employers and pension funds alike.
These changes include introducing climate change risk reporting requirements, a new type of pension scheme and implementing the legal infrastructure for the highly-anticipated pensions dashboard service. The Government has now given an indication of when regulations bringing these into force are likely to be published.
Collective money purchase schemes
Collective money purchase schemes (CMPs) are a new type of scheme established by the Act. Sometimes known as a 'shared risk' scheme, CMPs are similar to defined contribution schemes as the member pays contributions into the scheme and will receive a pension benefit based on the value of the pension pot.
Unlike defined contribution schemes, each member of a CMP will own a proportionate share of the scheme’s collective assets, rather than just their own individual share. This means the risk is shared with all scheme members, rather than the risk lying with each individual member. This also means that CMP scheme trustees may employ higher-risk investment strategies as each member’s benefit will be paid from the fund, rather than their own individual pot. In reality, the benefit a member receives in retirement may fluctuate as the fund’s assets fluctuate.
CMPs offer a greater degree of flexibility and, according to the Government’s CMP Impact Assessment, may potentially deliver a higher level of pensions overall compared to the traditional defined contribution scheme.
For employers with staff in the Local Government Pension Scheme (LGPS) or the defined benefit structure of the Social Housing Pension Scheme (SHPS) who are looking to review their pensions strategy, the introduction of CMPs provides a further option.
Draft regulations are expected to be published for consultation in early summer but with no timescale for implementation indicated yet.
Extended powers for the Pensions Regulator
Although not yet in force, the Pensions Regulator (the Regulator) will be granted a series of extended powers. To accompany the new powers, a series of new civil and criminal offences have also been created.
Under the Act, the Regulator will have a host of new powers, including, the ability to issue the following penalties:
- Up to £1m as a civil penalty, or up to 7 years imprisonment and/or a fine as a criminal offence, where an employer is found to have avoided an employer debt;
- Up to £1m as a civil penalty or an unlimited fine as a criminal offence, where a person (including an employer) fails to comply with a contribution notice; and
- Up to £1m as a civil penalty, where an employer fails to comply with the declaration of intent requirements.
The Regulator has also been given two additional grounds upon which a contribution notice can be issued.
Guy Opperman, the pensions minister, has confirmed that none of these new powers will be retrospective and may only be used by the Regulator once the powers come into force. A consultation on draft regulations is expected this spring with the powers coming into force in the autumn.
Given the potentially high penalties and potential criminal liability associated with the new powers, employers and schemes should ensure they cooperate with the Regulator and comply with any requests it might make or requirements it might have. Recent statistics have shown that enforcement activity by the Regulator is increasing as Covid-19 easements end. It is therefore important that employers and funds take proactive steps to manage their pension provision.
The long-awaited pensions dashboard service (a digital dashboard that will contain all of a person’s pension savings information) has now been given a legal definition under the Act. This sets out the requirements that must be met for a dashboard to be considered a 'qualifying' pensions dashboard.
Although there is still much more work to be done before we will see a working pensions dashboard, the Act has set the legal groundwork for the development and creation of a dashboard service. For now, employers and funds should watch this space.
A consultation on draft regulations is expected later this year with regulations coming into force in 2022.
Defined benefit scheme funding changes
The Act contains several changes to the existing scheme funding legislation, including a new duty on defined benefit scheme trustees to determine a funding and investment strategy. A scheme’s strategy will need to ensure that pensions, and other benefits granted by the scheme, can be provided over the long term.
To accompany the strategy, trustees will also need to prepare a written statement of strategy as soon as is reasonably practicable after the strategy has been determined. This statement will also need to include supplementary matters including:
- The risks faced by the scheme in implementing the strategy and the steps trustees intend to take to mitigate these risks;
- In the trustees’ opinion, how successfully the strategy is being implemented; and
- The trustees’ reflections on previous significant decisions they made that relate to the strategy.
Trustees of defined benefit schemes should be sure to take reasonable steps to comply with their new obligations, as a failure to do so may lead to the issuing of a penalty by the Regulator under their new powers.
Additional regulations are due to be consulted on later this, so watch this space.
Climate change risk reporting requirements
Under the Act, the Department for Work and Pensions (DWP) will receive new powers to create regulations requiring the trustees or managers of occupational pension schemes to publish information on the impact of climate change on their scheme, and to review the exposure of the scheme to climate risks and monitor their investment strategy accordingly.
The DWP will also be granted the power to issue penalties of up to £50,000 (or £5,000 to individuals) for non-compliance.
Going forward, pension funds will need to pay appropriate attention to climate risks. When it has been estimated that LGPS funds currently hold investments of £9.9 billion in fossil fuels and three-quarters of local councils have stated that their largest carbon emissions will come from their pension fund investments, the Act is likely to lead to a significant shift in approach. Draft regulations were published in January, and are expected to come into force before autumn.
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