David Fairs, Executive Director for Regulatory Policy, Analysis and Advice, discusses how the Pension Schemes Act 2021 will improve the savings landscape and will ultimately bring about better outcomes for savers.
Pension Schemes Act 2021
Thanks for inviting me, it’s great to be here.
I’ve only got limited time and lots to talk about so I’m going to dive right in.
The Pension Schemes Act 2021 is very welcome. It’s designed to make pensions better, safer and greener. It will improve the savings landscape and will ultimately bring about better outcomes for savers. So, from The Pensions Regulator's (TPR) perspective, we were very pleased to see it granted royal assent.
It’s fair to say that there has been quite a reaction to some elements of the Act, especially the new criminal powers for TPR. There has been concern from some quarters, and a healthy debate about what it will all look like in practice. Will trustees be thrown in jail? Will it scare potential trustees away? Will TPR become too powerful? Is it all too much? Does it go far enough?
Someone asked me whether the new Act was revolutionary or evolutionary.
Well, I do believe there are aspects of the Act that will have a significant impact for savers and have the potential to transform the pensions landscape: The dashboard, collective defined contribution (CDC), the new requirements on environmental, social and governance (ESG). These developments have the potential to revolutionise the way people save for their future.
The impact will spill beyond the boundaries of pension savings - as schemes step up their responsibilities on climate change and shift investments into green economies, all of us - and the planet - could benefit. The dashboard could bring about a much more engaged, proactive generation of savers. And if the CDC model is broadened it will drive developments in the product market and change the way people save.
However, I think it’s fair to say that these things, as well as the new criminal powers for TPR and the new defined benefit (DB) funding code, are developing policy in areas that already had some momentum. They are not going to shake the system to its foundation, not even the new criminal powers for TPR, which is what seems to have caused the most disturbance. They are all designed to refine and improve the current system.
On balance, I’d say we have an evolution, not a revolution.
Before I get into some of the detail of the Act and what it means for DB schemes, I’d like to say a few words about our recent Annual Funding Statement which was published two weeks ago.
Annual Funding Statement
Funding levels are looking positive.
Although some individual schemes and employers are really struggling, the tranche we looked at for the Annual Funding Statement (AFS) as a whole is in surplus. Perhaps surprising given the year we’ve had - but companies have benefitted from government support. Most schemes, and employers, have managed to keep to their pension commitments. Less than 200 schemes asked to reduce or postpone their deficit contributions.
However, we want to stress that even if the covenant looks strong, trustees should remain vigilant as we emerge from what I hope, is the worst of the pandemic. There is still a lot of uncertainty and there could well be an increase in insolvencies.
If a company hasn’t been impacted by Covid and the scheme is in surplus, then we want trustees to make sure the scheme continues to be in a good place as the government support comes to an end. A phrase you’ll have heard from us before: make hay while the sun shines.
For those companies who were initially hit hard by Covid, but are recovering, there could be some short-term affordability constraints. Trustees should consider very carefully any requests to lower contributions. We expect any request to be short term, and we want to see higher contributions in subsequent years.
For those who have been impacted heavily by COVID-19 - trustees and employers should be working closely together. Trustees may need to be flexible, but the pension scheme should not be the only creditor feeling the pain. They should be treated fairly among other creditors. Dividends may need to be put on hold. Trustees might want to put in place contingent arrangements and should certainly look at their integrated risk management (IRM) strategy. Robust risk management is essential.
Each scheme will need to consider its position individually depending on the impact of COVID-19, the impact of Brexit, maturity and funding positions as well as the impact of climate change.
Please do read the AFS, as it will equip both trustees and employers to look to the long term and do the right things; it also sets out the actions we expect.
TPR powers
The Pensions Schemes Act 2021 has introduced a strong package of measures, but they are not going to fundamentally change our approach to how we deal with inappropriate actions.
Let’s move on to the new criminal offences contained in section 107 of the Pension Schemes Act.
These are the two new offences which carry a potential seven-year jail term and an unlimited fine; they are for avoiding employer debt to a scheme or behaviour risking accrued scheme benefits.
This will be available for us to use where we see behaviour which deliberately, or recklessly, puts DB savers’ benefits at risk.
The offences are not yet in force but are expected to be by Autumn.
If there is one aspect of the Act that has generated the most discussion and column inches it’s this. There were concerns raised whilst the Pension Schemes Bill was making its way through Parliament about when TPR would, and when we wouldn’t, take action.
It’s understandable that you and anyone impacted by the new Act needs clarity and so we published our draft policy about this for consultation.
The policy aims to set out how we intend to approach the investigation and prosecution of these offences. In doing so, we will be guided by our understanding of the Government’s policy intent for the offences.
That is: not to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour, but to enable us to tackle the more serious intentional or reckless conduct that was already within the scope of our Contribution Notice power, and to increase the deterrent and punishment of such conduct.
The consultation on our policy closed on the 22 April and we are now reading through the responses submitted and deciding what amendments to make to our guidance.
We will publish our formal response to the consultation in due course but I can trail some of the emerging themes.
We received 49 responses from different stakeholders.
Overall, the respondents have been supportive of our focus for these powers being on the more serious intentional or reckless conduct that as I just said, was already within the scope of our Contribution Notice (CN) powers, or would be in scope if the person was connected with the scheme employer.
However, they have also made suggestions for improvement:
- A number of respondents made suggestions on how to improve the examples we have provided, eg in relation to the factors we would consider significant in determining whether a person has a reasonable excuse.
- Respondents have also sought more clarity with regard to the retrospectivity of the offences and our language on the seriousness of behaviour caught by the offences.
- Some respondents have questioned whether the use of statutory mechanisms such as apportionment arrangements or Company Voluntary Arrangements would provide some indication of a target having a reasonable excuse.
- Respondents I think understand that clearance will not apply to the new criminal offences but some have asked to what extent getting a clearance statement could provide an indication that they would not be prosecuted, even if the clearance regime does not apply to the new offences. During Parliamentary debate it was made clear there was no intention for any immunity from prosecution, and we have no power to extend the effect of clearance statements to apply to the criminal offences.
But we are carefully reviewing and considering all suggestions as we draft the final version of the policy.
Respondents have also highlighted the need to provide information about our approach to the use of the new civil fines of up to £1 million for avoidance of employer debt or risking accrued members benefits.
This is certainly something we plan to do, but it will be properly covered in other policies to be published in due course. We expect the bulk of this work to be done in time for the commencement of the offences, which we anticipate being in the Autumn.
We have already been working with the other prosecuting authorities on the possibility of a co-ordinated approach to these new offences, which I think you would welcome, so we are in discussions with the Northern Ireland Prosecuting Service, the Crown Prosecution Service in England and Wales and the Crown Office and Procurator Fiscal Service in Scotland.
The Secretary of State, for their part, is supportive of this, and we are already working with the Department for Work and Pensions (DWP) to agree a Memorandum of Understanding. Whilst being mindful not to commit the other prosecutors, our ambition is to make progress on Memoranda of Understanding with others so that they are also in place by the time the offences are commenced in the Autumn.
It is important to remember that whether a person is finally found guilty of committing an offence under one of these new powers will depend on the courts and their interpretation of the law.
We will of course be updating the policy as our experience in using the offences evolves and court decisions emerge.
Although these new powers are significant, you won’t see an immediate uptick in fines, prosecutions or prison sentences.
It’s not going to change the behaviour we investigate, but it will fundamentally change the options available to us.
It’s important for me to point out that a person can only be successfully prosecuted if all the elements of the offence are shown to be met. Which means showing they intended to avoid employer debt to a DB scheme, or they knew or ought to have known their act or failure would put DB savers’ benefits at risk, and in either case that they had no reasonable excuse for acting as they did.
Each element of the criminal offence would also need to be proved to the criminal standard of ‘beyond reasonable doubt’. These are high thresholds for any prosecuting authority to meet.
When prosecuting the offences, not only will we need to show the person’s requisite intention, but the onus will be on us to prove that the accused did not have a reasonable excuse.
I recognise that any phrase that contains an element of subjectivity tends to bring nervousness. Especially, and understandably, in conjunction with criminal law. That is evident from some of the consultation responses.
Ultimately, the courts will decide whether a person being prosecuted has a reasonable excuse and will decide whether to impose a sanction.
I’d like to stress again that TPR is a risk-based and proportionate regulator and this measured approach will continue with how we use these new powers. We will only use these powers where it is appropriate and reasonable to do so.
Environmental, social and governance (ESG)
The Pension Schemes Act states that trustees should be considering the effects of climate change and will require them to engage more fully with the risks and opportunities arising from it. A scheme that does not consider climate change is ignoring a major risk to pension savings and missing out on potential investment opportunities.
The requirements around climate-related financial disclosures will impact around 100 schemes in the first wave - those schemes with assets over £5 billion, including master trusts.
For trustees to be able to show that information and comply with the requirements, they need investment managers to be able to provide them with the right information. In turn, investment managers need to obtain information from individual companies that they invest in.
At the moment that information is not always complete, consistent or available.
So we know that information flows will not be perfect at the outset and may vary significantly between assets classes.
The Pension Schemes Act and regulations will allow for that and TPR will be proportionate in our regulatory approach.
But we do believe the situation will improve quickly: A critical mass of information on climate change is beginning to build.
As a result, I believe the advice and analysis available from service providers should begin to improve. This means that it should, in the not too distant future, become easier for trustees of all schemes to assess the risks and opportunities from climate change.
Our Climate Strategy, which was published in April, shows how we will help and promote understanding around climate change as well as how we will take forward enforcement with both current and future requirements.
Our strategy has three main aims:
- Ensuring that trustees report on climate change, in line with their legal requirements. Trustees must show us that words and intentions translate into action.
We will be clear about our expectations, and we will work with the industry as we develop and implement our regulatory approach. And we’ll enforce where it’s not being complied with. - Secondly we will work with other financial regulators to drive change and to co-ordinate our work. ESG is a system wide issue and so we must work closely with other regulators.
- Thirdly and importantly, TPR will, as a business, take part in the transition to net-zero.
For those a little light on reading, we will also be publishing guidance over the summer to help schemes comply with the new requirements.
Conclusion
In summary, I have flown through these topics and I appreciate there may be aspects that you wanted to hear about that I have not addressed. I also appreciate that with consultations on regulations from the Pension Schemes Act, consultations on new code and guidance, our call for input on the consumer journey issued jointly with the FCA and the Dashboard consultation on staging - to mention just a few current items, that there is a lot to read, digest and comment on. Unfortunately, I don’t see that slowing down in the near term. There is currently a lot to do for all of us at the moment.
But please do get involved with those consultations. Please let us know your thoughts and concerns. The more we hear from the industry which is, day to day working within the framework of the Act, the better the outcome will be for everyone - most importantly for the savers.
