Pension Schemes Act 2021

Policy background

Collective Money Purchase Benefits

2. Collective money purchase is the legislative term for collective defined contribution ("CDC") schemes where contributions into the scheme are pooled and invested with a view to delivering an aspired benefit level. An important principle of CDC schemes is that contributions into the scheme are fixed, and the benefit level offered can only ever be a target or an estimate. It is not guaranteed by the employer and members should recognise from the outset that the benefit levels aspired to may not be achieved and that the level at which pensions are paid may fluctuate.
3. The Government published a consultation on delivering CDC schemes in October 2018. 1
4. Following the consultation, the Government committed to legislate to allow CDC schemes to operate in the United Kingdom (UK).
5. Part 1 of the Act provides the legislative framework to establish and operate CDC schemes. The Act refers to CDC benefits and CDC schemes using the terms Collective Money Purchase Benefits and Collective Money Purchase Schemes. It takes this approach to be consistent with existing terminology in pensions legislation.
6. Part 1 includes provision for CDC schemes to be authorised and supervised by the Pensions Regulator and requirements to disclose certain information to members to ensure that there is appropriate communication and transparency about how the scheme operates.

The Pensions Regulator’s powers

7. The Pensions Regulator is the independent UK regulator of work-based pensions. Its statutory objectives are set out in the Pensions Act 2004, one of which is to protect the benefits of members of occupational pension schemes. To do so, it works with trustees, employers, and business advisers of occupational pension schemes in the private and public sectors, to help them understand their legal duties and the standards expected.
8. The Regulator also has an enforcement role where it can investigate both breaches of regulations and action by sponsoring employers and other related entities which may have a detrimental effect on schemes. It can impose civil penalties, undertake criminal prosecutions, or order relevant individuals to make payments into the scheme.
   
9. The Act builds on the Government commitment to tighten the rules of abuse against pension schemes by improving the Pensions Regulator’s powers so that they:
   • can be more proactive and get involved earlier when sponsoring employers make changes which could impact the pension scheme;
   • have the necessary powers to be able to obtain the right information about a scheme and its sponsoring employer in a timely manner;
   • are able to gain redress for a pension scheme and its members when things go wrong; and
   • can deter reckless behaviours.

10. In March 2018, the Government published the White Paper ‘Protecting Defined Benefit Pension Schemes’. 2 The White Paper stated that the existing system of protection is working well for the majority of Defined Benefit pension schemes, members, trustees and sponsoring employers, but that there were ways in which the system could be improved further.
11. In June 2018, the Government published the consultation: ‘Protecting Defined Benefit Pension Schemes - A Stronger Pensions Regulator’, which set out the Government’s proposals to improve and amend the Regulator’s existing powers, including establishing new Criminal Offences and Financial Penalties, and changes to the Contribution Notice (CN), Financial Support Direction (FSD), and Corporate Transaction Oversight regimes. 3 Stakeholders were generally supportive of the Government’s proposals, seeing them as a positive step towards ensuring the security of Defined Benefit scheme members’ savings.
12. In February 2019, the Government published its response to the consultation, outlining the proposals it would take forward. 4 This response also included measures that the Government would take forward to improve the Regulator’s Information Gathering powers.
13. Cumulatively, the improvements to the Regulator’s powers in this Act will help the Regulator to meet their aim of being "clearer, quicker, and tougher", and, in turn, will afford increased protection for Defined Benefit scheme members’ savings.

Criminal and Civil Sanctions

14. To support its enforcement role, the Regulator can impose criminal offences and financial penalties on sponsoring employers and other related entities who engage in wrongdoing in relation to their defined benefit pension scheme. Existing offences target a limited list of breaches only, and current penalty amounts are not an effective deterrent to more serious breaches.
15. The measures in the Act will strengthen the existing sanctions regime by introducing three new criminal offences, and a new power to issue civil penalties of up to £1 million.
16. The new offences and penalty will create a stronger and more comprehensive sanctions regime. They will provide additional deterrents for unscrupulous behaviours and, will enable the Regulator to punish abuse and wrongdoing within the occupational pensions industry appropriately.

Contribution Notices (CNs)

17. In order to safeguard Defined Benefit pension scheme members’ benefits, and to minimise the risk of a call on the Pension Protection Fund, the Regulator has a range of powers, including the power to issue CNs to recover any losses caused to a Defined Benefit pension scheme as a result of avoidance behaviours.
18. The Regulator’s CN regime is generally fit for purpose. Following a small number of cases, it has become apparent that changes are necessary to update and strengthen the regime.
19. The measures in this Act amend the CN regime, and in doing so, will ensure that the industry has greater clarity around the meaning of the current legislation, and will enable the Regulator to take effective and efficient action as appropriate.

Corporate Transaction Oversight

20. The provisions in the Act will require certain persons involved in a corporate transaction to make a statement setting out information about the event and how any detriment to a Defined Benefit pension scheme, as a result of this event, is to be mitigated.

Gathering Information

21. One of the Pensions Regulator’s powers is to investigate potential breaches of pension legislation. To do this, they have a range of information gathering powers which enable them to inspect premises and the records held there, interview individuals, and issue formal written requests for information. The Regulator can also impose civil penalties or instigate criminal proceedings for non-compliance where they are investigating a potential breach of pension legislation.
22. These information gathering powers vary depending on the particular function the Regulator undertakes, or the type of pension scheme it is investigating. The fact that the Regulator has the power to undertake inspections only in some circumstances, interviews in others, or issue civil penalties in different specified circumstances, can hinder investigations and cause confusion among those being regulated.
23. The measures in the Act will give the Regulator a more coherent set of information gathering powers.

Pensions Dashboards

24. Pensions dashboards build on the Government’s commitment to help people with better planning for retirement and to achieve financial security in their later life. Pensions dashboards are online services which will allow people to access their pension information in a clear and simple form. They will bring together an individual’s savings from multiple pensions, including State Pension, in a single place online. The Money and Pensions Service will bring together industry to lead the development and delivery of dashboards and Government has committed to facilitate this, including to provide an appropriate legislative framework and safeguard the interests of consumers. The Money and Pensions Service will also provide a non-commercial dashboard service.
25. The Government sought views on making it a legal requirement for pension schemes to provide data via dashboards, in the Government’s consultation ‘Pensions dashboards: Working together for the consumer’,5 published on 3 December 2018. Overall, there was consensus that this is crucial for the successful delivery of dashboards. The ‘Government response to the consultation’, 6 published on 4 April 2019, confirmed the Government’s commitment to enact the necessary requirements.

Defined Benefit schemes: funding

26. The scheme funding provisions deliver the Government’s commitments in the White Paper ‘Protecting Defined Benefit Pension Schemes’ 7 to improve the system and to ensure it continues to protect members’ Defined Benefit pensions in a maturing landscape. With most schemes closed, comprising fewer contributing members, or reaching a phase where pension scheme benefits only are being paid out, it is important trustees manage their funding and investment decisions with a clear strategy for ensuring pensions and other benefits can be provided over the long term. Although the White Paper showed most sponsors and trustees work well together and use the flexibilities of the current system reasonably, good practice is not universal. The new scheme funding provisions seek to help trustees to improve their scheme funding and investment decision-making and to strengthen the Pensions Regulator’s ability to take stronger, more effective, action to protect members’ pensions.
27. The provisions:
    • require trustees to have a scheme specific funding and investment strategy, and for the Statutory Funding Objective to be achieved in the context of this strategy. The White Paper describes this as a long term objective, which could be to ‘run on’ with minimal employer support; to buy out with an insurer, or to enter a consolidator;
    • require trustees to explain to the Regulator their approach to achieving the strategy in a statement of strategy, including information on mitigating risks, submitted with the actuarial valuation - described as a Defined Benefit Chair’s Statement in the White Paper;
    • require the trustee board to appoint a Chair, who is responsible for signing the statement on behalf of the Board;
    • strengthen the Regulator’s scheme funding enforcement powers, enabling them to direct trustees to revise their funding and investment strategy if they fail to comply with their legislative requirements.

28. New regulation-making powers, to be used with existing regulation-making powers, will ensure regulations can contain sufficient detail to support trustees and their sponsoring employers to be clear about what they are required to do.

Climate change risk

29. In 2019, the Government published its Green Finance Strategy 8 which made commitments to steps the Government will take to ‘green’ the financial system. The climate change risk provisions in Part 5 of the Act support the Government’s expectation, set out in the Green Finance Strategy, that all large asset owners will make disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) by 2022. The TCFD recommendations are the most widely used framework against which institutional investors report and assess exposure to the financial risk of climate change.
30. Section 124 inserts new sections into the Pensions Act 1995, to provide a legislative framework for requiring trustees and managers of occupational pension schemes to make disclosures in line with the TCFD recommendations.
31. The new powers will enable regulations to be made requiring trustees or managers of occupational pension schemes to undertake specified governance-related activities and to publish information relating to the effects of climate change on the scheme. Such regulations may require that trustees or managers take into account the different ways in which the climate might change and the steps that might be taken as a result, including with regard to climate change goals such as the goal in Article 2(1)(a) of the Paris Agreement 9 of holding the increase in the average global temperature to well below 20C above pre-industrial levels. The inserted provisions will also enable regulations to be made providing the Pensions Regulator with streamlined enforcement powers to address compliance issues.
32. The long-term objective is to protect members’ benefits against the physical risks of climate change and ensure that scheme trustees and managers are properly taking into account the risks and opportunities associated with the transition to a lower-carbon economy.
33. The new powers will be subject to the consultation requirements in section 120 of the Pensions Act 1995.
34. Schedule 11, paragraph 12 of the Act makes equivalent provision for Northern Ireland to that made for Great Britain by section 124, by inserting new articles into the Pensions (Northern Ireland) Order 1995. 10

Transfers of rights

35. These sections amend existing legislation to permit regulations to be made to stipulate the destinations and circumstances under which a pension scheme member will have a right to transfer their pension savings to another pension scheme. This will protect members from pension scams by helping trustees of occupational pension schemes ensure transfers of pension savings are made to safe and not fraudulent schemes.

Pension Protection Fund

36. The Pension Protection Fund (PPF) pays compensation to members of eligible occupational pension schemes, where the sponsoring employer has become insolvent and the scheme’s assets are insufficient to meet its pension commitments. The policy intention is that an individual’s relevant fixed pension and any other pensionable service within the scheme should be added together for the purposes of determining their PPF compensation payment, and applying the cap, where relevant.
37. A High Court ruling (Anthony Beaton v the Board of the PPF)11 determined that where an individual has benefits derived from a fixed pension transfer, such benefits are not attributable to pensionable service and thus cannot be aggregated with the individual’s other pension benefits for the purposes of applying the compensation cap.
38. To ensure that the PPF could continue to administer the compensation regime as intended, the Pension Protection Fund (Compensation) Regulations 200512 and the Pension Protection Fund (Multi-employer Schemes) (Modification) Regulations13 were amended prospectively to enable a fixed pension to be treated as pensionable service for the purposes of calculating PPF compensation, except when aggregating benefits for the cap. Section 126 provides for those amendments to be treated as if they had always applied, so that the legislation supports the policy intent and past practice.

Administration Charges

39. In March 2014, the Government published Better workplace pensions: further measures for savers (Cm 8840)14 which detailed a range of measures to tackle pension charges to protect employees in workplace Defined Contribution pension schemes.
40. The scope of these and subsequent measures rely on how an administration charge is defined. The Government has received a number of informal queries over whether particular costs or charges are covered by the definition of "administration charge" as currently drafted. The measure will update the definition to make clear which costs are in scope of the overarching definition.
41. There are existing measures in secondary legislation which rely on the definition of "administration charge". These include charge caps for stakeholder pension schemes and schemes used for automatic enrolment. It is not the intention to change the effect of any of those measures. Corresponding changes will be made to the relevant secondary legislation to retain the existing policy.