After multiple public consultations and a nearly 18 month parliamentary journey, the Pension Schemes Act 2021 (the “Act”) has finally received Royal Assent.

The Act introduces important changes including enhanced enforcement powers for the Pensions Regulator (the “Regulator”) (including new criminal offences), additional defined benefit (“DB”) scheme funding requirements, changes to transfer rights, new climate change risk governance requirements, and a legislative framework for collective money purchase pension schemes.

The Act has significant implications for employers and trustees of DB pension schemes who will need to make sure they understand the implications of those changes. However, some of the Act’s provisions apply to all occupational pension schemes . Employers and trustees of defined contribution (“DC”) schemes should therefore ensure that they are aware of the changes relevant to them.

The government has not confirmed when the provisions of the Act will be brought into force.

1. Changes to the Regulator's Enforcement Powers

The Act gives the Regulator stronger powers in a number of key areas. In particular, the Act creates a range of new criminal offences and gives the Regulator the ability to issue civil penalties of up to £1 million in certain circumstances. It also imposes additional obligations to notify certain corporate activity to the Regulator and trustees. The changes largely affect DB schemes.

Criminal offences

The Act introduces the following new criminal offences, which could result in up to seven years in prison and/or an unlimited fine:

  • Avoidance of a statutory employer debt (“s75 debt”).
  • Conduct risking accrued scheme benefits.

These offences apply to any “person” involved with the activity in question, meaning that the scope of individuals caught by the new offences is wide. As well as applying to employers and members of their group, a “person” could be taken to mean anyone involved with a pension scheme, including trustees, banks lending to sponsoring employers, professional advisers, insurers and investment counterparties. However, insolvency practitioners are explicitly excluded.

There is also a new criminal offence for failure to comply with a contribution notice, which is punishable by an unlimited fine.

There is a defence of “reasonable excuse” for the new offences. The Regulator is expected to issue further guidance on the offences and the reasonable excuse defence.

The Act also creates new criminal offences for providing false or misleading information to the Regulator in relation to a funding and investment strategy statement, a notifiable event or a declaration of intent. These are all punishable by a fine and/or up to two years in prison.

Civil penalties

The Act gives the Regulator the power to impose a civil penalty of up to £1 million for the following offences:

  • Avoidance of a s75 debt.
  • Conduct risking accrued scheme benefits.
  • Failure to comply with a contribution notice.
  • Failure to comply with the notifiable events regime.
  • Failure to comply with the requirements for a declaration of intent.
  • Knowingly or recklessly providing the Regulator (or, in certain situations, trustees) with false or misleading information.

The ability to impose these civil penalties is subject to a lower burden of proof than the criminal offences outlined above. The civil penalties can also be imposed on any person who “knowingly assisted” in any of the above breaches.

New grounds for contribution notices

The Act adds two new grounds under which the Regulator can issue a contribution notice, namely:

  • The “employer insolvency test” – where the Regulator believes that an act or failure to act has materially reduced the amount of the s75 debt that the scheme could have recovered if a s75 debt had been triggered immediately after the act or failure to act.
  • The “employer resources test” – where the Regulator believes that an act or failure to act has reduced the value of the employer’s resources and this reduction is material relative to the scheme’s estimated s75 debt.

Whilst the Act widens the grounds for imposing a contribution notice, the Regulator must still establish that it is reasonable to impose one. The Act also sets out certain statutory defences to a contribution notice being issued.

Declarations of intent

The Act requires the “appropriate person” to notify the Regulator:

  • of certain prescribed events;
  • of any material change in, or in the expected effects of, the relevant event; and
  • if the relevant event is not going to, or does not, take place.

The list of prescribed events will be set out in regulations, but is expected to include a number of corporate events such as the sale of a controlling interest in the employer, the sale of the employer's business or assets, and the granting of security in priority to scheme debt.

The notification must be accompanied by a statement setting out a range of additional information about the event including a description of any adverse effects on the scheme, any steps taken to mitigate those effects, and a description of any communications with the trustees about the event. A copy of this statement must be sent to the trustees.

The definition of “appropriate persons” is wide, potentially applying to other members of the employer’s group, advisers and other third parties. The declaration of intent requirement is therefore much broader in application than the existing notifiable events regime.

Information-gathering powers

The Act gives the Regulator additional information-gathering powers and sanctions. These enable the Regulator to require relevant individuals to attend interviews and give the Regulator additional scope to inspect premises. Failure to attend an interview, or to answer questions in an interview, without a reasonable excuse will be a criminal offence punishable by a fine. The Regulator can also issue fixed and escalating civil penalties for failure to comply with its information-gathering powers.

Which schemes are these changes relevant to?

The changes to the Regulator’s powers almost exclusively affect DB schemes. The exceptions are the changes to the Regulator’s information-gathering powers and sanctions and the new £1 million penalty for knowingly or recklessly providing the Regulator with false or misleading information – these will apply to all schemes, whether DB or DC.

The government has confirmed that the changes to the Regulator’s powers will not be retrospective – they will only apply to acts that occur after the powers come into force.

2. New Funding and Investment Strategy

The Act introduces a requirement for trustees of DB schemes to produce a written funding and investment strategy.

Trustees of DB schemes will be required to determine and keep under review a strategy that specifies the funding level that the trustees plan for the scheme to have achieved by a particular date (to be determined by regulations), as well as detail of the investments that the trustees intend the scheme to hold at that date. The strategy must be agreed with the employer.

Trustees are expected to keep a written statement of their funding and investment strategy. This must be updated as soon as reasonably practicable after the strategy is revised and must be signed by the trustee chair. The Regulator will have the power to direct trustees to revise their funding and investment strategy in certain circumstances.

Regulations will set out further detail on what the funding and investment strategy needs to cover, and the Regulator’s revised DB funding code of practice will provide additional guidance.

Which schemes is this change relevant to?

The requirement to produce a funding and investment strategy will only apply to DB schemes.

3. Transfer Rights

The Act makes changes to member transfer rights.

With a view to preventing members transferring to suspected scam vehicles, the Act imposes a requirement for certain conditions to be met before a member can transfer their benefits to another scheme. Further detail will be provided in regulations, but the Act indicates that these regulations will contain conditions relating to the member’s employment and place of residence.

Which schemes is this change relevant to?

The new conditions will apply to transfers from DB and DC schemes.

4. Climate Change Risk

The Act includes a framework for new climate risk-related governance and reporting requirements for trustees of some schemes.

The detailed requirements will be set out in regulations and statutory guidance. The government is currently consulting on draft versions of the regulations and guidance. Under the draft regulations, trustees will be required to:

  • Establish and maintain oversight of the climate-related risks and opportunities that are relevant to their scheme.
  • Identify and assess the impact of climate-related risks and opportunities which they consider will have an effect over the short, medium and long term on their scheme’s investment strategy and (where applicable) funding strategy.
  • Undertake triennial scenario analysis considering certain prescribed matters in at least two scenarios where there is an increase in the global average temperature.
  • Establish and maintain processes for identifying, assessing and managing climate-related risks which are relevant to their scheme.
  • Select at least two emissions-based metrics and one additional climate-related metric, set a target in relation to at least one of those metrics, and measure the scheme’s performance against the target(s) annually.
  • Publish an annual report containing various prescribed matters relating to the trustees’ climate-related risk governance, strategy and risk management processes. The report must be signed by the trustee chair and published on a website.

The Regulator will have powers to enforce compliance, including the ability to issue fines of up to £5,000 for an individual trustee and £50,000 for a corporate trustee.

Which schemes is this change relevant to?

The governance and reporting requirements are expected to apply to DB and DC schemes as follows:

  • From 1 October 2021 – schemes with £5 billion or more of assets, all authorised master trusts and all authorised collective money purchase pension schemes.
  • From 1 October 2022 – schemes with between £1 billion and £5 billion of assets.

5. Pensions Dashboards

The Act sets out a structure for provision of a pensions dashboard service.

The service is intended to enable individuals to see details of all their pension savings in one place. The full detail of how the service is to be established and administered, as well as what information dashboards will provide to individuals and what information trustees will be required to provide to dashboards, will be set out in regulations.

Which schemes is this change relevant to?

The pensions dashboard service will apply to benefits held in DB and DC schemes.

6. Collective Money Purchase Pension Schemes

The Act sets out a legal framework for the establishment and administration of collective money purchase schemes.

Also known as collective DC (or “CDC”) schemes, collective money purchase schemes will be subject to authorisation and supervision by the Regulator. The use of collective money purchase schemes will be restricted to a single employer or two or more associated employers.