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UK: Pension Schemes Bill introduced

DWP proposes substantial increases to the general levy on pension plans

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By Mark Dowsey | January 14, 2020

The introduced bill covers new powers to TPR, a legislative DC plan framework and plan trustee strategy reporting. The DWP proposes general levy increases.

Employer Action Code: Monitor

Among other things, the new Pension Schemes Bill will give significant new powers to The Pensions Regulator (TPR) regarding the governance of defined benefit (DB) plans, establish the legislative framework for collective money purchase plans, and require DB plan trustees to document and report on their long-term funding and investment strategy. The Bill was introduced in parliament on January 7. In a separate announcement, the Department for Work and Pensions (DWP) proposed substantial increases — the first in over a decade — to the general levy on occupational and personal pension plans from April 2020.

Key Details

The main provisions of the Pension Schemes Bill include:

  • Strengthening of TPR’s powers:
    • Employers participating in a DB plan would be required to notify in advance the trustees and TPR of specified corporate transactions:
      • The sale of a material proportion of the employer’s business or assets, for employers that have funding responsibility for at least 20% of the plan’s liabilities
      • The granting of security on a debt that gives another creditor priority over the employer’s debt to the plan
    • The rules around TPR’s issuance of Contribution Notices and Financial Support Directions (collectively known as its moral hazard powers) would be enhanced, and information-gathering powers would be extended to include inspections and the ability to call individuals for interview.
    • Fining powers (civil penalty up to GBP 1 million) would be increased, as well as new criminal sanctions for “willful or reckless behavior in relation to a pension scheme” or “failure to comply with a Contribution Notice,” which could result in a seven-year prison term and/or an unlimited fine.
  • A new requirement for DB plan trustees to prepare and submit periodic statements to TPR on their funding and investment strategy to ensure that pensions and other plan benefits can be provided for over the long term: The statement would need to cover the extent to which the strategy is being successfully executed, the main risks, and how these would be mitigated or managed.
  • The framework for establishing, operating and regulating collective money purchase (CMP) plans: See the June 3, 2019, Global News Brief for more information.
  • The introduction of online pension dashboards to allow individuals to access their information from state and private pensions in one place: Trustees of occupational pension plans and personal pension providers would be required to send relevant information to dashboard services with penalties for noncompliance.

Paying for the supervisory regime

The DWP’s consultation document lays out four options for increasing the general levy on DB plans, which is used to fund TPR, the Pensions Ombudsman, and the Money and Pensions Service. For most plans, the levy is based on the total number of members. The current annual payment varies for plans with more than 99 members, from GBP 290 (100 to 999 members) to GBP 430,000 (over 500,000 members). The DWP’s preferred option is an initial increase of 10% for 2020/2021, followed by further increases in future years (to be determined). The other scenarios would have more substantial increases.

PSV versus Bauer (in the Court of Justice of the European Union)

In an unrelated development, the Court of Justice of the European Union (CJEU) has handed down its judgment in a case involving the Pensions Sicherungs Verein (PSV) — the German and Luxembourg pension guarantee institution. In previous judgments, the CJEU had concluded that European Union member states are required to provide a minimum degree of protection for employees’ pension expectations when their employer becomes insolvent — “at least half of the old age benefits [must] be guaranteed.” In its recent ruling, the court qualified its previous findings by saying that guaranteeing only 50% of the benefit could still be “manifestly disproportionate” if such a reduction would mean that the former employee would have to live below the “at-risk-of-poverty” threshold for the member state concerned.

It seems likely that member states’ entities for guaranteeing pensions, including the PSV and the U.K.’s Pension Protection Fund (PPF), will need to consider ways to ensure that this minimum underpin is met, although the longer-term effect of the judgment for the PPF is less clear in the event of a “hard” Brexit.

Employer Implications

Employers will want to be mindful of the regulatory environment changes, once enacted, and ensure that plans comply as needed. Companies should evaluate the suitability of CMP for their situation (including potential accounting treatment), based on the combination of defined contribution risk characteristics from the employer’s perspective and potentially superior benefit forms and outcomes for plan members. In theory, the CJEU ruling could potentially cause entities such as the PSV and PPF to adjust the levies they charge to covered plans, though the likelihood and impact (if any) are not yet clear.

Author

Mark Dowsey
Director

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