New pension regulations will come into force this year. What will they mean for trustees, employers and savers?
Further provisions of the Pension Schemes Act 2021 are set to come into force in 2022, aimed at protecting the retirement funds of savers in defined benefit (DB) pension schemes. What will this mean for trustees, employers and savers, and how can they prepare?
The new notifiable events regime is the most pressing agenda item for scheme trustees and employers in their role as sponsor of DB pension schemes.
A DB scheme offers employees a retirement fund based on the number of years they have been a member of their employer’s pension scheme and their final or average salary. A defined contribution (DC) scheme offers savers a retirement fund based on the accrual of the contributions they make during their employment, together with contributions made by their employer.
From 6 April 2022, the regime requires sponsoring employers of DB schemes to notify The Pensions Regulator (TPR) and scheme trustees when a ‘decision in principle’ is made about certain corporate transactions: for example, the sale of a material proportion of its business or assets.
This aims to alert TPR to corporate activity that could see an employer call on the Pension Protection Fund (PPF) should they become insolvent, or when their scheme’s funding level falls below the PPF’s buy-out level.
Employers must ensure they fully understand the definition of ‘decision in principle’, when it applies and how to approach prospective corporate deals accordingly.
“At the decision in principle stage, assuming it’s just maybe heads of terms or perhaps a verbal agreement, that is usually confidential and the employer wouldn’t necessarily want to tell the trustees, so [the regulations are] requiring the employer to inform the trustees at an earlier stage, which could be an issue,” says Carolyn Saunders, head of pensions at Pinsent Masons.
If employers fall foul of the new notifiable events regime they could risk a wider range of employees being on the receiving end of TPR’s new criminal powers. The powers can be used for ‘any person’ found to have put savers’ pensions at risk. This liability will extend to third parties involved in a corporate deal, including lenders and professional advisers.
“One of the challenges is that the net of people [who could be held liable] is so broad and may affect people not involved with a scheme on a day-to-day basis,” says Leah Evans, pensions board chair at the Institute and Faculty of Actuaries.
Pension scheme trustees and managers should focus on raising awareness throughout their organisation about the types of activity on which TPR will expect to be notified. They should encourage employees to ask questions at the outset of any corporate transaction, particularly board members, chief financial officers and treasury and corporate restructuring teams.
Mark Engelbretson is head of pensions at Network Rail, which operates two open DB schemes. “For me, it is all around challenging my relevant advisers, administrators, scheme actuary, investment consultants and scheme lawyer when going through any project and looking at changes or updating processes that we work on together, to ensure that we cover absolutely every piece of ground that we possibly can and stress test different scenarios,” he says.
Trustees of DB schemes are also waiting on the publication of TPR’s second consultation on its new DB funding code, which has been delayed until late summer. The first consultation outlined plans for a scheme-specific funding regime, which enables scheme trustees to opt for a ‘fast-track’ route if their scheme valuation is compliant with TPR’s code guidelines. There is a ‘bespoke’ route for trustees who cannot or choose not to comply with the former route. In such cases, supporting evidence would be required to illustrate how trustees plan to manage any additional risk to their scheme.
There is hope that the second consultation will address the current lack of differentiation between open and closed DB schemes, given that open schemes are likely to have a different investment strategy with a greater risk appetite.
“The fact is that new money and new contributions and members are still coming into a number of DB pension schemes,” Engelbretson says.
Scheme trustees and sponsoring employers can prepare by ensuring they agree on a long-term scheme funding strategy that all stakeholders can buy into.
A new pension scheme known as the collective defined contribution (CDC) scheme is expected to be introduced around the same time as the publication of TPR’s funding code consultation. CDC schemes should come into force on 1 August 2022 and provide members and employers with fixed contribution rates, which are invested collectively, thus pooling investment and longevity risks.
Royal Mail has announced plans to implement its own CDC scheme, known as the Royal Mail Collective Pension Plan, which would make it the first UK company to do so.
Climate change regulations
From 1 October 2022, trustees of new authorised CDCs will be subject to the new Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021, along with trustees of DB schemes with assets of more than £1bn.
The regulations require trustees to identify, manage and disclose in an annual report all climate-related risks and opportunities affecting their pension funds.
In the document known as the Taskforce on Climate-related Financial Disclosures (TCFD) report, trustees are required to disclose information about their pension scheme governance, strategy and risk management, along with their metrics and targets; these should be published within seven months of the end of a scheme year.
The regulations, which entered force for trustees of larger DB pension schemes with assets of £5bn and above and authorised master trusts on 1 October 2021, are designed to better identify, assess and manage climate risk, which may directly or indirectly affect members’ funds.
Further preparation is required for the phased implementation of pensions dashboards, which will be introduced from April 2023 through to 2026. The dashboards aim to provide savers with access to their multiple pensions savings, including their State Pension, in one place online.
This is likely to be welcome news for those involved in debates over the adequacy of savers’ retirement funds amid concerns about the number of companies that have moved from DB to DC pension schemes for their workforce.
“If we’ve got a big cohort coming to retire who can’t afford to retire, I think overall there’s going to be a greater focus again on adequacy, what companies provide and perhaps where the balance should sit between private and personal and state provision,” Evans says.