The newly minted Pension Schemes Act 2021 heralds momentous change. The ambitious legislation provides greater safeguards for the £2-trillion defined benefit (DB) pension sector by extending the Pensions Regulator’s sanctions regime with three new criminal offences, seven-year jail sentences for wrongdoers and civil penalties of fines up to £1 million for those who recklessly neglect their responsibilities to members.
The act also brings in new funding requirements, including the need for DB schemes to set a legally binding long-term objective, and a framework for the long-awaited pension dashboard with an optimistic launch date of 2023. The idea is to bring pensions into the digital age, making information about retirement savings available to savers via their smartphone, tablet or computer screens, thereby revolutionising the way we plan for later life.
Savers will also be better protected from scams by tightening the rules and guidance required around transfers, ensuring suspect moves are red flagged and cannot proceed before expert guidance is sought. Trustees too will have new duties to assess and report on the financial risks of climate change within their portfolios.
Commenting on the new legislation, minister for pensions and financial inclusion Guy Opperman says: “It has made pensions safer, better and greener. Safer, by cracking down on scams and unscrupulous bosses. Better, by making pensions more accessible through the dashboard. And greener, by encouraging investment in a more sustainable way.”
But beyond the well-meaning intentions of the government, whether the act will achieve its laudable objectives is open to question.
Glaring weaknesses in pension protection
The collapse of BHS and Carillion with black holes in their pension schemes highlighted glaring weaknesses in pensioner protection. More widely, 3,149 of the 5,318 remaining DB schemes have a massive total deficit of £212.4 billion and are in a precarious position.
Former pensions minister Baroness Ros Altmann stresses: “Too many employers seem to have managed to pay handsome bonuses to senior staff, for example, while leaving their pension deficit unaddressed.”
There may be yet worse to come with the coronavirus pandemic likely to lead to many more firms failing with their pension funds in the red, so it is in the nick of time that the Pensions Regulator has been granted these extensive powers.
Could the cure be worse than the disease? Employers and their advisers could now face criminal sanctions for wrongdoing based on what they should have known, but 20:20 vision in hindsight is nigh on impossible. This will lead to a boom time for pension lawyers as employers will be fearful to take a step without their advice. Legal fees could go through the roof.
But only a very few pension trustees have faced a jail sentence so change here seems unlikely. Much depends on how the regulator uses its new powers with further guidance expected this year.
Dauntingly difficult dashboard task
Of seminal importance is the long-awaited dashboard which takes one step nearer to fruition. Left unchecked, by 2035 there may be 27 million small pension pots, according to research by NOW: Pensions and the Pensions Policy Institute, many lost and forgotten. The pensions dashboard will remedy this by displaying everyone’s pensions in one place.
“The act is an important milestone,” says Chris Curry, principal of the Pensions Dashboard Programme at the Money and Pensions Service, “as it unlocks the next stage of law-making around dashboards, which will make it compulsory for pension schemes and providers to connect to the dashboards.”
But it is also dauntingly difficult. Charles Cowling, chief actuary at Mercer, notes: “Highly complex pension data is stored on old systems, which are often unreliable and not standardised, and there are no agreed standards for benefit calculations or even consistency of terminology. Even state pension records are unreliable. It could take many years before we have systems that can reliably access pension data in a standard form and then convert it into the dashboards envisaged for members.”
The volume of data involved is going to be eye-watering and a big risk in terms of careful management. Tyron Potts, associate and head of pensions research at Barnett Waddingham, says: “Security of this data will be paramount and delivery will be complex, requiring collaboration between hundreds of different providers and pension schemes.”
Public service schemes face a particular challenge. Sir Steve Webb, former pensions minister and now partner at LCP, warns: “Many of them already have record-keeping issues. The McCloud judgment on age discrimination could create a huge amount of work; public service schemes are already indicating it could be years before they are in a position to devote resources to supplying data to a dashboard.”
Anyone who expects an all-singing, all-dancing dashboard with comprehensive information by 2023, and with a system akin to open banking, will be disappointed, for different types of scheme will come online at different times. The fear is that, with incomplete information, consumers will not trust the dashboard and will not use it.
Climate change is also creeping up the agenda, with the likes of Sir David Attenborough and Love Actually director Richard Curtis pushing the £6-trillion pension industry with its massive buying power to go green. The new legislation recognises this with an emphasis on schemes to consider the climate change impact of the investments they make on behalf of members and publish information on how this has been achieved.
Finally, the Pension Schemes Act also opens the door for Royal Mail’s new-style collective defined contribution scheme. Watch this space.