The UK seems to legislate on pensions with metronomic regularity, with a new act arriving every three years on average since 1993. The latest of these, which came into force in February, promises to be more radical than most.
Along with imminent new regulations, the Pension Schemes Act 2021 is set to impose greater responsibilities on trustees, while other changes include a new funding regime for defined-benefit schemes; new criminal offences; and provisions designed to tackle climate change.
The legislation also provides for the introduction of a new type of pension called a collective defined-contribution (CDC) scheme.
“This is a mash-up of an occupational defined-benefit pension, which provides an employee with a set amount of money each year of their retirement, and a defined-contribution scheme, where a member retires with an investment portfolio that may or may not last them throughout their old age,” explains Annabelle Williams, personal finance specialist at Nutmeg.
It’s hoped that CDC schemes, which are already common in the Netherlands and Canada, will draw on features of both pension types to form a hybrid with the potential to bridge the gap between the haves and the have-nots of retirement.
The act also introduces measures to tackle scams. According to figures published in July by the Financial Conduct Authority, more than £2m had been lost to pension fraud in the preceding five months alone.
Most significantly, high-profile pension scandals in recent years, such as those affecting BHS and Carillon employees, have fuelled demand for reforms to the trustee’s role. In particular, the perceived lack of willingness or ability on the part of trustees to report concerns to the Pensions Regulator (TPR) has drawn a lot of criticism.
The criminal offences created by the act apply principally to employers, but they could also affect trustees, according to Anthea Whitton, pensions partner at law firm Eversheds Sutherland.
“The offences have become much broader in scope,” she says. “For instance, the offence of wilful or reckless behaviour in relation to a pension scheme, as outlined in the government’s white paper of March 2017, was said to be intended to tackle reckless bosses. Criminal liability would not be imposed on a person with a ‘reasonable excuse’, but the act gives no detail on what this means. The uncertainty is likely to cause concern for directors, trustees and third parties, given that the penalty is an unlimited fine or up to seven years’ imprisonment. There’s also the possibility of a civil sanction of up to £1m.”
Nigel Down is search director at Trust Associates, a consultancy specialising in the recruitment of trustees and investment advisers for pension funds. He believes that it’s “too early to tell what specific impact the act has made on the role of the trustee, but it is clear that the overall intention is to make them more accountable for the decisions their schemes make and the effects these may have on their members. For example, the new offence of ‘failure to act’ shifts the burden of responsibility further on to trustees.”
Although the aim of the act is to encourage all those involved in managing pensions, especially defined-benefit schemes, given recent scandals, to act more responsibly, many experts point to the fact that it is broadly drawn. In light of the widely criticised handling of the BHS pension scheme as part of the company’s sale in 2016, the legislation has been extended to cover a number of corporate transactions. However laudable the intentions of that move are, it means that the act will almost certainly usher in a period of uncertainty as trustees, advisers and shareholders wait to see how courts interpret the new provisions and what actions TPR takes.
Claire Carey a partner and pensions specialist at law firm Sackers, says: “There’s always the risk that parties such as trustees and their advisers could get caught in the crossfire when having to consider any company proposals relating to defined-benefit schemes. Generally, trustees are very much going to have these new provisions in their minds. There are many shades of grey, which will lead to a much more cautious approach.”
The act also paves the way for new obligations relating to climate change. From 1 October, trustees of occupational pension schemes managing assets worth more than £5bn will be required to monitor and manage the impact of climate-related risks on their schemes.
Will the extra responsibilities and potential penalties deter people from becoming lay trustees?
“We anticipate that lay trustees may feel concerned about the risk of action against them, possibly to the point that it will be harder for some schemes to find member-nominated trustees,” says Jo Myerson, a professional independent trustee and director at Ross Trustees. “For experienced professional trustees who are well advised and are asking the right questions, the risk is manageable. Indeed, we have long been used to acting robustly. Our sense is that the most crucial piece of the jigsaw will be the audit trail to prove that any actions taken were reasonable.”
It does seem likely that lay trustees will find themselves becoming more reliant on professional guidance from experts. Three-quarters of those responding to a recent survey by the Pensions Management Institute said that they needed better access to information, for instance.
Ultimately, the goal of the government and the pensions industry alike is simply to ensure that trustees do all they can to safeguard pension pots, so that their contributors get back what they deserve in retirement.
With this in mind, Gail Izat, workplace MD at Standard Life, says: “With this increased focus on governance encompassing the whole pensions landscape, it’s likely that employers will be engaging earlier and more often with the trustees of the schemes they participate in.”
‘I feel a level of personal involvement as a trustee’
“One element of my new job that’s surprised me somewhat is the level of responsibility I feel for the members of my schemes.”
So says Tiziana Perrella, an actuary who joined Dalriada Trustees, an independent provider of trustee services, as a professional pension trustee at the end of last year.
Perrella believes that the Pension Schemes Act 2021 will increase the demand for greater professionalism on trustee boards, with more independent specialists being appointed alongside employer- and member-nominated members. She also foresees that a professional trustee company will be appointed as a scheme’s sole corporate trustee in an increasing number of cases.
Given her actuarial background, Parrella is particularly interested in how the new legislation will affect pension governance. She envisages that it will have a beneficial effect in at least one respect
“A lack of clarity on endgame objectives leads to insufficient preparation, meaning that schemes miss out on market opportunities and the security of their members’ benefits is not maximised as a result,” she says. “I therefore believe that the requirement in the act for schemes to have a specific long-term strategy designed to deliver an agreed long-term objective is a positive development.”
A compliance checklist for trustees
Pension trustees need to act now to comply with both the current regulations and those coming down the line.
- Update your risk registers and review them regularly. TPR recommends the use of an agreed evaluation process to rate risk events based on the likelihood of their occurrence against their impact if they were to transpire.
- Obtain professional advice on every aspect of your work and consider further training to improve your knowledge. The Pensions Management Institute offers an award in pension trusteeship based on TPR’s indicative syllabus.
- Check regularly whether any proposed action could, under the terms of the Pension Schemes Act 2021, be considered “conduct risking accrued scheme benefits” or “a notifiable event”.
- Ensure that you have a clear funding strategy for the long term, as well as a policy on climate-change reporting.
- Keep your reporting structures under continual review. “Trustees will need to rethink internal processes to ensure that anything which needs to be reported under the act is captured – and that the sponsoring employer doesn’t accidentally cause an offence,” advises Anthea Whitton of Eversheds Sutherland. “In short, trustees have more reporting responsibilities under the new act and, if they fail to comply, more liabilities.”