The Pension Schemes Act 2021 received Royal Assent on 11 February and is arguably the most important piece of pensions legislation since 2004.
The Act covers a range of issues, most notably significant enhancements to the Pensions Regulator’s “moral hazard” or “anti-avoidance” powers. Concerns have been raised by the pensions industry – and the wider business community – as to the scope of these new powers, in particular the new criminal offences which could apply to anyone involved in making decisions which affect a defined benefit scheme or its employer, including third parties such as advisers and banks.
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New grounds for contribution notices
The Act introduces two new grounds upon which the Regulator can issue a contribution notice to scheme employers and connected or associated parties. These are the employer insolvency test and the employer resources test:
1. Employer Insolvency Test
An act (or failure to act) that would have resulted in a scheme recovering a lower amount from the employer, had the employer suffered an insolvency immediately after that act (or failure to act).
2. Employer Resources Test
An act (or failure to act) that reduces the resources of an employer to an extent that is material in the context of the estimated section 75 debt due to the scheme (i.e. the shortfall in the scheme’s funding on a buyout basis).
These tests could apply to a wide range of situations including:
- restructuring or group reorganisations;
- refinancing or granting security;
- business sales; and
- payment of dividends.
New criminal offences
The Act introduces three new criminal offences, as well as extending the scope of the existing offence of knowingly providing false or misleading information to the Regulator.
It was originally proposed that there would be two new offences: failing to comply with a contribution notice and "wilful or reckless behaviour in relation to a defined benefit pension scheme". However, the latter has been split into two: avoidance of an employer debt without reasonable excuse and conduct risking accrued scheme benefits without reasonable excuse. The new offences and the extension of the existing offences are summarised in the table below.
|Offence||Penalty||Who does it apply to?|
|Failure to comply with a contribution notice||Unlimited fine||Employers and connected or associated parties|
|Avoidance of an employer debt without reasonable excuse||Up to 7 years in prison and/or unlimited fine||Anyone|
|Conduct risking accrued scheme benefits without reasonable excuse||Up to 7 years in prison and/or unlimited fine||Anyone|
|Providing false or misleading information in relation to a notifiable event or a funding strategy statement||Up to 2 years in prison and/or fine of up to £1m||The person required to provide the information|
New notifiable events
The Act will expand the Regulator’s notifiable events regime, requiring employers and connected parties to give advance notice or a “declaration of intent” to the Regulator (and trustees) of certain events. Details are to be included in Regulations but it is expected that the new requirements will apply to:
- A decision to sell a material part of the employer’s business or assets;
- A decision to grant security which would rank ahead of any debt to the pension scheme; and
- A change in control of the employer.
The penalty for non-compliance will be a fine of up to £1m.
When do the new powers come into force?
Although the Act has received Royal Assent, the Pensions Minister has said that the new powers will not come into force until the Regulator has issued guidance on its expectations and enforcement policy – expected later this year. However, employers and their wider groups should have regard to them now. In particular, unless the legislation is clarified by the Orders bringing these provisions into force, it is arguable that any acts within the last 6 years could be caught by the new contribution notice powers.
Other changes made by the Act
The Act makes a wide range of other changes to pensions legislation including:
the introduction of a legislative framework for collective money purchase schemes, a new type of pension scheme;
- legislation to support the introduction of pension dashboards, enabling an individual to access information about all of their pension savings in one place;
- a new duty on trustees of defined benefit schemes to implement and keep under review a long-term funding and investment strategy, to sit alongside the Regulator’s new DB funding code of practice which is currently the subject of consultation;
- the introduction of restrictions on a pension scheme member’s right to a cash equivalent transfer value, in a bid to tackle the increasing risks of pension scams; and
- new regulation - making powers to enable the Government to impose requirements on pension scheme trustees in relation to the governance of the scheme’s investments with respect to the effects of climate change.
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In depth article
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