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Quick resurrection for Pension Schemes Bill in 2020

Retirement
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January 8, 2020

The Pension Schemes Bill 2020 has been introduced to the new Parliament and is almost identical to the version published last year with key measures on funding and new TPR powers.

The Pension Schemes Bill that was introduced in the autumn has been reinstated following December’s election. The 2020 Bill, bar a couple of minor amendments, is identical to the October 2019 Bill, containing provisions to introduce long-term funding objectives, new powers for the Pensions Regulator (TPR), pensions dashboards and the framework for collective defined contribution (CDC) schemes – named collective money purchase in the Bill.

Funding and investment strategy

This section of the Bill, unchanged from the October 2019 Bill, has the potential to alter materially the defined benefit funding regime that has been in force since 2005. Trustees will be required to have a documented strategy for ensuring that pensions and other benefits under the scheme can be provided over the long term. This “funding and investment strategy” will need to specify the intended funding level on this long-term basis at specified future dates and the investments the trustees intend to hold in future. The trustee chair will be required to sign and submit this document to TPR periodically, together with a statement describing the extent of success in implementing the strategy so far, reflections on relevant decisions taken, and the approach to the management or mitigation of risks in implementing the strategy.

Other notable points are:

  • The trustees must consult the employer on the strategy and, where agreement is currently required for statutory funding purposes, there will need to be agreement on the long-term strategy.
  • The scheme’s technical provisions must be consistent with the long-term strategy. Further guidance on this issue is expected from TPR, and trustees will need to consider with their Scheme Actuary whether changes to the technical provisions approach are required to demonstrate this consistency.
  • Provision is made for regulations to set out the approach to be taken to assess whether a recovery plan is “appropriate” – this will shed more light on the requirement, which has stood since 2005.

Extension to TPR’s powers will require scrutiny

In relation to TPR’s powers, the earlier Bill introduced criminal penalties under which persons found guilty of an offence could face a seven-year jail term and/or unlimited fines. The potential application of these measures was far broader than had been understood from Ministerial statements; these measures remain within the new version despite the efforts of a cross-section of the pensions industry to have them made more proportionate. The concern is that these provisions could bring some everyday actions, and the trustees and advisers who execute them, within the scope of the penalties. While the measures will now be subject to parliamentary scrutiny affording an opportunity to bring them into line with the more widely agreed objective of penalising the wilful or reckless endangering of benefits, their retention is a concern.

Dashboards

As before, the Bill contains enabling powers to establish pensions dashboards with the detail to be set out in regulations, guidance etc.

Collective Defined Contribution (CDC) framework

CDC will be a new type of pension arrangement in the UK, in which funding costs are generally fixed for employers, and member pension levels vary in accordance with the financial health of the scheme. The collective nature of the scheme means that members share investment and longevity risks, providing protection from volatility. CDC schemes will target higher pension levels than under DC insured annuities. This part of the Bill follows lobbying of Government by Royal Mail Group and Communication Workers Union to allow CDC schemes.

The CDC framework is in material respects unchanged from that in the October 2019 Bill. The framework provides for regulations which would allow a single or connected employers to open a CDC scheme, and includes powers for the Secretary of State to expand this to other types of CDC schemes, potentially those for multiple non-associated employers or CDC Mastertrusts. The Bill covers many aspects of CDC including most notably:

  • CDC schemes’ rules must set out how benefit adjustments are to be determined based on actuarial valuations
  • TPR will authorise each CDC scheme before opening, much like the regime for DC master trusts, and will have powers to supervise the running of CDC schemes where significant events occur
  • Members will have the same rights to a transfer out as for defined benefit schemes.

The Bill has many areas that provide for regulations to expand the framework.

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