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Pension Schemes Act 2021

Contents

Part 5: Further provision relating to pension schemes

Scheme funding

Section 123: Funding of defined benefit schemes

  1. Section 123 introduces Schedule 10 to the Act which provides for amendments to the statutory framework for defined benefit pension scheme funding set out in Part 3 of the Pensions Act 2004.

Schedule 10: Funding of defined benefit schemes

Background
  1. The White Paper Protecting Defined Benefit Pension Schemes proposed a package of measures to deliver clearer more enforceable scheme funding standards in order to better protect members’ pensions. These amendments deliver the measures proposed in the White Paper.
221A Funding and Investment Strategy
  1. Paragraph 2 inserts a new section 221A into the Pensions Act 2004.
  2. Subsection (1) of section 221A imposes a duty on trustees or managers to have a funding and investment strategy for the purpose of ensuring pensions and other scheme benefits to and in respect of members can be paid over the long term. In the White Paper we described this as a long term objective for the scheme.
  3. Subsection (2) of section 221A sets out what the strategy must cover, including the planned ‘funding level’ of the scheme on the relevant date or dates, and the planned investments to be held by the scheme on those dates.
  4. Subsection (3) makes clear that the funding level is the ratio of assets to liabilities and provides for regulations to set out how ‘relevant date’ is determined.
  5. Subsection (4) makes provision for regulations which may make provision:
  • to require trustees or managers to take into account prescribed matters and follow prescribed principles when determining the funding and investment strategy relating to the scheme. For example, the regulations may require information in relation to the scheme’s maturity, whether it is open or closed and the financial strength of the sponsoring employer. Factors such as these will affect the timeframe, funding levels and investments which are held;
  • for the level of detail required in the strategy;
  • to set how long trustees have to determine their strategy; and
  • to specify when trustees should review and if necessary revise their strategy – for example, the regulations could be used to require trustees to review their strategy annually.
  1. Subsection (5) makes clear the matters and principles trustees may be required to take into account includes the actuarial methods or assumptions used to determine the funding level.
  2. Subsection (6) means that trustees who do not have a funding and investment strategy which complies with the requirements in new section 221A could be subject to a civil penalty where they have not taken all reasonable steps to ensure compliance: this could be up to £5,000 for individuals and up to £50,000 for organisations.
221B Statement of strategy
  1. Paragraph 2 also inserts new section 221B into the Pensions Act 2004.
  2. Subsection (1) of section 221B requires trustees to prepare a written statement, defined as a "statement of strategy", setting out the scheme’s funding and investment strategy itself and supplementary matters. In the White Paper this was referred to as a "DB Chair’s Statement".
  3. Subsection (2) sets out the supplementary matters to be included in the statement. These are:
  • the trustees’ assessment of whether the funding and investment strategy is being successfully implemented, or any remedial action they intend to take, to get the strategy back on course;
  • the key risks and mitigations for implementation; reflections on any key decisions trustees have taken and lessons learned; and other prescribed matters, which may include a view of the sponsoring employer.
  1. Subsection (3) does three things:
  • defines the written statement required under subsection (1) of section 221B as a ‘statement of strategy’;
  • makes clear Part 1 of the statement of strategy is to cover the funding and investment strategy; and
  • Part 2 of the same statement is to cover the supplementary matters.
  1. Subsection (4) requires trustees or managers to regularly review and where necessary revise Part 2 of the statement of strategy and on occasions which may be prescribed in regulations.
  2. Subsection (5) requires trustees or managers to consult the employer when preparing the supplementary matters to be included in the statement of strategy.
  3. Subsection (6) requires the chair of the trustees to sign the statement of strategy on behalf of the scheme trustee board. Regulations may require a person to meet prescribed conditions to be appointed chair.
  4. Subsection (7) requires the trustee board to appoint a Chair if they do not already have one.
  5. Subsection (8) provides that regulations may be made to:
  • require the trustees or managers to take account of prescribed matters and follow prescribed principles when preparing Part 2 of the statement of strategy;
  • ensure sufficient detail is included in Part 2 of the statement for example to explain trustees’ decision making and to support the Pensions Regulator in their regulatory enforcement;
  • require trustees to provide the information required in the statement in a particular form i.e. a template;
  • set out when, and the occasions on which trustees must send the statement to the Regulator – for example to ensure the statement is submitted every three years with the actuarial valuation, or to ensure a revised statement is submitted following a direction from the Regulator to the scheme to revise their funding and investment strategy.
  1. Subsection (9) provides that trustees who do not comply with these requirements can be subject to the section 10 of the Pensions Act 1995 civil penalty where they fail to take all reasonable steps to secure compliance.
Amending the Statutory Funding Objective
  1. The statutory funding objective requires schemes to have sufficient and appropriate assets to cover its technical provisions (section 222 of the Pensions Act 2004).
  2. Paragraph 3 of Schedule 10 inserts new subsection (2A) into section 222 of the 2004 Pensions Act so that the calculation of the scheme’s technical provisions is consistent with the scheme’s funding and investment strategy as set out in the scheme’s statement of strategy.
Requirements in relation to actuarial valuations and reports
  1. Paragraph 4 of Schedule 10 amends section 224 of the Pensions Act 2004. It inserts subsection (7A) to require trustees to send to the Regulator as soon as practicable, an actuarial valuation (full report) prepared for the purposes of Part 3 of the Pensions Act 2004, together with any other prescribed information. Other prescribed information may include the statement of funding principles, the statement of investment principles and, as noted, the statement of strategy.
  2. The amendment at sub-paragraph (3) provides that trustees who do not comply with the requirements under subsection (7A) can be subject to the section 10 of the Pensions Act 1995 civil penalty where they fail to take all reasonable steps to secure compliance.
Recovery plan
  1. Paragraph 5 amends section 226 of the Pensions Act 2004 so that regulations can set out the matters to be taken into account, or the principles to be followed, in determining whether a recovery plan is appropriate for the purposes of subsection (3) having regard to the nature and circumstances of the scheme. These may include matters such as the length of time taken by trustees to meet the statutory funding objective, taking into account whether the sponsoring employer can afford to pay more into the scheme.
Matters requiring agreement of employer
  1. Paragraph 6 amends section 229 of the Pensions Act 2004 to require the trustees or managers to obtain the sponsoring employer’s agreement to the funding and investment strategy (as defined in section 221A).
Powers of the Regulator
  1. Paragraph 7 amends section 231 of the Pensions Act 2004 so as to make provision regarding the action the Pensions Regulator can take when trustees do not comply with the requirements relating to the funding and investment strategy (set out in this Act and any subsequent regulations). Subparagraph (3) inserts paragraph (aa) at subsection (2) which provides that the Regulator may direct trustees or managers to revise the scheme’s funding and investment strategy in accordance with the direction.
  2. Part 2 of Schedule 10 contains minor and consequential amendments to the Pensions Act 2004. Paragraph 9 amends section 60 so that the full name and address of any chair of the trustees is registrable information. Paragraph 10 amends section 80 so that the offence under that section covers information provided in the statement of strategy under new section 221B. Paragraph 11 amends section 316 which governs Parliamentary control of subordinate legislation.

Climate change risk

Section 124: Climate change risk

  1. Section 124 inserts new sections into Part 1 of the Pensions Act 1995 (Occupational Pensions). The new sections confer powers on the Secretary of State to make regulations with a view to securing that there is effective governance of occupational pension schemes with respect to the effects of climate change, to require publication of information relating to the effects of climate change, and to secure compliance with the governance and publication requirements imposed in regulations.
41A Climate change risk
  1. Subsection (1) of new section 41A enables the Secretary of State to make regulations imposing requirements on trustees or managers of occupational pension schemes, of a description to be prescribed in the regulations, with a view to securing that there is effective governance of the scheme with respect to the effects of climate change.
  2. Subsection (2) makes clear that the effects of climate change in relation to which requirements may be imposed include risks arising from steps taken because of climate change and opportunities relating to climate change.
  3. Subsection (3) lists particular types of requirements that may be imposed on trustees or managers by the regulations. For example, these may include requirements about reviewing the scheme’s exposure to risks of a description to be prescribed in regulations (subsection (3)(a)) and requirements about assessing the scheme’s assets in a manner to be prescribed in regulations (subsection (3)(b)).
  4. Subsection (4) makes further provision as to the requirements which may be imposed under subsection (3)(b) about assessing the assets of a scheme. It provides that regulations may, in particular, include a requirement to assess the exposure of a scheme’s assets by reference to risks of a description to be prescribed in regulations. It also makes clear that regulations may include a requirement to determine the contribution of the scheme’s assets to climate change.
  5. Subsection (5) provides that regulations may require trustees or managers to take into account the ways in which the climate might change and the steps that might be taken because of such changes.
  6. Subsection (6) enables regulations made under subsection (5) to require trustees or managers to adopt assumptions as to future events, as prescribed in the regulations. These may include assumptions about the steps that might be taken for the purpose of achieving climate change goals - including the "Paris Agreement goal" – and assumptions about achievement of the goals themselves.
  7. Subsection (7) requires trustees or managers to have regard to guidance prepared by the Secretary of State from time to time when complying with requirements in regulations made under section 41A.
  8. Subsection (8) defines the meaning of "Paris Agreement goal" by reference to Article 2(1)(a) of the Paris Agreement.
41B Climate change risk: publication of information
  1. Subsection (1) of new section 41B enables the Secretary of State to make regulations to require trustees or managers of occupational pension schemes, of a description to be prescribed in regulations, to publish information relating to the effects of climate change on the scheme. The details of the information that must be published and how it must be published are to be prescribed in the regulations.
  2. Subsection (2) provides a non-exhaustive list of the types of requirements that may be included within the regulations.
  3. Subsection (3) requires trustees or managers to have regard to guidance prepared by the Secretary of State from time to time when complying with requirements in regulations made under section 41B.
41C Sections 41A and 41B: compliance
  1. Subsection (1) enables the Secretary of State to make regulations with a view to ensuring that trustees and managers comply with requirements in regulations made under new sections 41A and 41B. References to "the Authority" are to the Pensions Regulator – see section 124(1) of the Pensions Act 1995.
  2. Subsection (2) sets out various provisions that may, in particular, be included in the regulations such as provisions enabling the Pensions Regulator to issue compliance notices and penalty notices. Subsection (2)(d) enables provision to be made in regulations for references to the First-tier Tribunal or Upper Tribunal in respect of disputes about a penalty notice or the amount of a penalty.
  3. Subsection (3) enables provisions for determining the amount, or maximum amount, of a penalty issued by the Pensions Regulator to be made in regulations. This is subject to the limit, set out in subsection (4), of £5,000 in the case of an individual, and £50,000 in any other case.
Other provisions
  1. Section 124(3) makes a consequential change to section 116 of the Pensions Act 1995 to ensure that a person who pays a penalty in accordance with regulations made under new section 41C cannot also be convicted of a criminal offence in relation to the same breach, and vice versa.
  2. Section 124(4) amends section 175 of the Pensions Act 1995 to include a new subsection (2A), which provides that the first regulations made under new sections 41A and 41B are subject to the affirmative resolution procedure.

Transfer rights

Section 125: Exercise of right to cash equivalent

  1. Section 125 places conditions on the right of a member to transfer their accrued pension rights to a different pension scheme and to protect members falling victims to pension scams. This right is set out in Chapter 1 of Part 4ZA and Chapter II of Part IVA of the Pension Schemes Act 1993 (sections 93-101P).
  2. Subsection (2) amends section 95 of the Act by inserting new subsections (6ZA), (6ZB) and (67C). New subsection (6ZA) provides a power to make regulations so that a member will only have a right to transfer if certain conditions prescribed in regulations are met. These conditions can be applied to transfers of accrued pension rights from personal pension schemes, unfunded public service schemes and other pension arrangements.
  3. New subsection (6ZB) provides a list of conditions that the regulations may prescribe including (but not limited to), under paragraph (a), a member’s employment or residency. Under paragraph (b), the regulations can make it a condition to provide the trustees or managers of the occupational pension schemes with information or evidence about the member’s employment or residence. Under paragraph (c), the regulations can prescribe the circumstances where it is a condition that the member obtains information or guidance from a prescribed person. Under paragraph (d), the regulations can make it a condition for the member to provide the trustees or managers with prescribed evidence that demonstrates they have obtained information or guidance from a prescribed person, or evidence that demonstrates they are exempt from these conditions.
  4. Evidence relating to the member’s employment may include (but may not be limited to) payslips, which will help establish a genuine employment link between the member and the employer of the scheme the member wants their pension benefits to be transferred into. New subsection (6ZC) enables the Secretary of State to make regulations requiring the trustees or managers of the occupational pension scheme to notify a member of the conditions which have been prescribed in regulations made under new section 95(6ZA).
  5. Subsections (3), (4) and (5) make provision in relation to situations where conditions under new subsection (6ZA) or section 95 or (5A) of section 101F have not been satisfied.
  6. Subsection (3) amends section 98 by inserting a reference to new section 99(2ZA) into subsection (2) so that the member loses the right to take a cash equivalent where the duty on the trustees is extinguished because a condition prescribed under new section 95(6ZA) is not met.
  7. Subsections (4) and (5) insert new subsections (2ZA) and (2ZB) respectively into section 99. Subsection (2ZA) exempts the trustees or managers of the occupational pension scheme from having to comply with the time period for facilitating a member’s request to transfer their pension benefits to another scheme if a condition prescribed under new subsection (6ZA) of section 95 is not met. Subsection (2ZB) exempts the trustees or managers of the occupational pension scheme from having to comply with the time period for facilitating a member’s request to transfer their pension benefits to another scheme (where the member was required by section 96(4) to give a transfer notice under section 101F(1) in addition to making a transfer application) because the conditions prescribed in regulations made under new subsection (5A) of section 101F have not been met.
  8. Section 101F (power to give transfer notice) sets when a trustee or manager of a qualifying scheme must facilitate a member’s request to transfer their pension credit benefit. Subsection (6) amends section 101F by inserting new subsections (5A), (5B) and (5C). New subsection (5A) provides a power to make regulations so that a member will only have the right to transfer their pension credit benefit if certain conditions prescribed in regulations are met. New subsection (5B) provides examples of the conditions which the regulations may prescribe. They include, but are not limited to, conditions about employment, place of residence and obtaining information or guidance in prescribed circumstances. New subsection (5C) enables the Secretary of State to make regulations requiring the trustees or managers to notify a member of the conditions which have been prescribed in regulations made under new section 101F(5A).
  9. Section 101J (time for compliance with transfer notice) deals with the time period within which trustees or managers must facilitate a member’s request to transfer their pension credit benefit. Subsections (7) and (8) amend section 101J by inserting new subsection (2AA) and (2AB) respectively. New subsection (2AA) exempts trustees or managers from having to comply with the time period for facilitating a member’s request to transfer their pension credit benefit if a condition prescribed under new subsection (5A) of section 101F is not met.
  10. Subsection (7) inserts new subsection (2AB) in section 101J to exempt the trustees or managers from having to comply with the time period for facilitating a member’s request to transfer their pension credit benefit if the conditions prescribed in regulations made under section 95(6ZA) have not been met, where the member was required by section 101G(4) to make an application under section 95(1) in addition to giving a transfer notice.

The Pension Protection Fund

Section 126: Modification of provisions relating to pensionable service

  1. The compensation to which an individual is entitled from the Pension Protection Fund is determined in accordance with Schedule 7 to the 2004 Pensions Act and regulations made under it. "Pensionable service" (see paragraph 36 of Schedule 7) is fundamental to the calculation of pension compensation. Amongst other things, it governs the compensation payable to those under their scheme’s normal pension age, the total benefits which are subject to the compensation cap and the payment of survivors’ benefits indexation and revaluation.
  2. The policy intent, and the Pension Protection Fund practice, is, and has always been, that a pension which arose by virtue of a transfer payment to the scheme, where the initial amount of the pension was determined at the time of the transfer payment, is treated as attributable to the person’s pensionable service. But, in the case Anthony Beaton v the Pension Protection Fund [[2017] EWHC 2623], the High Court decided that, when applying the compensation cap (see paragraph 26 of Schedule 7), benefits derived from such a transfer-in could not be said to be attributable to pensionable service and could not be aggregated.
  3. The amendments made to the Pension Protection Fund (Compensation) Regulations 2005 (S.I. 2005/607) and the Pension Protection Fund Multi-employer Regulations 2005 (S.I. 2005/441) by the Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) Amendment and Modification Regulations 2018 (S.I. 2018/988) ("the 2018 Regulations") restore the policy intent prospectively. They enable a fixed pension to be treated as pensionable service for the purposes of calculating Pension Protection Fund compensation, except when aggregating benefits for the compensation cap. The Regulations do not apply to the cap following the CJEU decision in the case of the Grenville Hampshire v the Board of the Pension Protection Fund (C-17/17). This provided that individuals are entitled to receive compensation to at least 50% of the value of their accrued pension entitlement from the Pension Protection Fund (see the Explanatory Notes to the 2018 Regulations).
  4. Subsection (1) remedies certain consequences of the Beaton judgement so that the legislation supports the policy intent and past practice. It does this by treating the amendments made to the Pension Protection Fund (Compensation) Regulations 2005 by the 2018 Regulations as if those amendments always had effect so far as they apply to the Pensions Protection Fund, thereby covering payments which have already been made since the Pension Protection Fund was established.
  5. Sub-section (2) makes similar provision in relation to the definition of pensionable service in the Pension Protection Fund Multi-employer Regulations 2005 (It achieves this by treating the amendment made to those Regulations by the 2018 Regulations 2018 as if that amendment always had effect).
  6. The amendments made by subsection (1) form part of the law of Great Britain and also apply to Great Britain. The amendment in subsection (2) forms part of the law of the United Kingdom but its territorial application is to Great Britain. This is consistent with the territorial application of the Pension Protection Fund Multi-employer Regulations 2005.

Administration charges

Section 127: Administration charges

  1. Schedule 18 to the Pensions Act 2014 allows the Secretary of State to make regulations which limit or prohibit particular types of administration charges in relation to pension schemes specified in the regulations. Section 1 of the Welfare Reform and Pensions Act 1999 ("the 1999 Act") sets out the conditions that must be met by a stakeholder pension scheme. These include that the scheme complies with such requirements as are set out in regulations concerning deductions from members’ pension funds in respect of charges and expenses.
  2. "Administration charge" is defined in Schedule 18 to the Pension Act 2014. Subsection (2) of this section amends the definition to make it clearer which charges are in scope of the definition. The effect of the amendments is that an "administration charge", in relation to a member of a pension scheme, means any use of the scheme’s assets to meet the administrative expenses of the scheme, to pay commission or in any other way, that does not constitute the member drawing their pension benefits, or moving their savings to acquire pension rights in in a different scheme. Subsection (1) makes similar amendments in relation to the description of administration charges in subsection (5) of section 1 of the 1999 Act (meaning of "stakeholder pension scheme").
  3. Subsection (3) amends subsections (6)(b) and (7) of Section 113 of the Pension Schemes Act 1993 (disclosure of information about schemes to members) and subsection (4) amends subsections (3)(b), (4) and (7) of Section 137FA of the Financial Services and Markets Act 2000 (FCA general rules: disclosure of information about pension scheme transaction costs etc) to make clear that transaction costs are a type of administration charge.

Categories of pension schemes

Section 128: Pension Schemes Act 2015: repeals

  1. This section repeals uncommenced sections of the Pension Schemes Act 2015 which have been superseded by the provisions in Part 1 of the Act.

Northern Ireland

Section 129: Further provision relating to pension schemes: Northern Ireland

  1. This section introduces Schedule 11 which contains provision for Northern Ireland corresponding to provision made for England, Wales and Scotland set out in sections 124 to section 128 and Schedule 10.

Schedule 11: Further provision relating to pension schemes: Northern Ireland

  1. This Schedule makes provision for Northern Ireland similar to that made by Schedule 10 and Part 5.

Part 1: Funding of defined benefit schemes

  1. Part 1 of the Schedule makes provision for Northern Ireland similar to that made by Parts 1 and 2 of Schedule 10.
  2. The paragraphs in Part 1 of Schedule 11 correspond to the paragraphs of the same number in Schedule 10. The power to make regulations contained in amendments made by this paragraph vests in the Department for Communities in Northern Ireland.

Part 2: Other provision

  1. Part 2 of the Schedule makes provision for Northern Ireland similar to that made by Part 5, sections 124 to section 128.
  2. Paragraph 12 (climate change risk) corresponds to section 124.
  3. Paragraph 13 (transfer rights: exercise of right to cash equivalent) corresponds to section 125. The power to make regulations contained in amendments made by this paragraph vests in the Department for Communities in Northern Ireland.
  4. Paragraph 14 (the Pension Protection Fund: modification of provisions relating to pensionable service) corresponds to section 126.
  5. Paragraph 15 (administration charges) corresponds to section 127.
  6. Paragraph 16 (categories of pension schemes: repeal of provisions of Pension Schemes Act (Northern Ireland) 2016) corresponds to section 128.
  7. This paragraph repeals uncommenced provisions of the Pension Schemes Act (Northern Ireland) 2016 which have been superseded by the provisions in Part 2 of the Act.

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