Employers could face up to seven years in prison for plundering pension funds, thanks to the biggest shake-up of UK pensions in decades.
The new Pensions Schemes Act, which received Royal Assent yesterday (11 February) has given the Pensions Regulator powers to issue civil penalties of up to £1m, alongside three new criminal offences for bosses who run pension schemes into the ground or plunder pots for their own financial gain.
The new rules come four years after high street department store BHS went into administration with a pensions deficit of more than £500,000, sparking a parliamentary review into the way pension funds are regulated.
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“This is an historic day for UK pensions,” said Guy Opperman, minister for pensions. “This act makes our pensions safer, better and greener, as we look to build back better from the pandemic.”
Under pre-existing rules, defined benefit pensions schemes already had a requirement to follow the statutory funding system. This new act adds a requirement that trustees will have to produce a longer-term funding and investment strategy for their scheme. It will also require them to explain what funding level they intend to reach and what investment they intend to hold as part of that strategy, and agree this with the employer.
However, experts have raised concerned that the new powers – which have been broadly drafted – could impact normal business activity.
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“At the very minimum, for employers it will mean thinking about any potential impact any actions might have on funds with more scrutiny,” said Joe Dabrowski, deputy director for policy at the Pensions and Lifetime Savings Association. This means an additional layer of risk management, and “will lead to more documenting, processing and assessments,” he said.
The new rules can be applied to companies, their directors, and their advisers, says David Saunders, partner at Sackers. They also broaden the scope of corporate activities that can be policed by the regulator, including reorganisations, mergers and acquisitions and payment of dividends.
But, it isn’t clear exactly how this will play out in practice, and whether it will be possible to prove that an employer has knowingly neglected its pension scheme, says Tom Selby, senior analyst at AJ Bell. “It is possible we will only discover this when the powers are used and possibly even challenged in the courts,” he said.
Selby added that while many would argue the bill has come too late, the tougher regimen should see employers putting pensions closer to the top of the corporate agenda.
The new Pension Schemes Act will also allow employers to offer collective defined contribution (CDC) schemes to members, where their money is pooled and invested collectively. In 2019, Royal Mail was given permission to launch such a scheme – which is designed to reduce the burden on employers and pools the risk to employees – and the bill now opens it up to other employers.
“It gives employers the option if they’re thinking about alterations to funding arrangements, or if they wanted a step up from defined contribution, it gives them a new avenue to explore,” said Dabrowski.
There are also a range of obligations introduced in the act that will encourage employers to look at their approach to climate change. Trustees of the largest pension schemes will be required to ensure effective governance of climate risk and opportunity, and to make certain disclosures around this. “This will lead to schemes having to articulate their approach much more to climate change, what they’re doing, how that’s making a difference,” Dabrowski said.
Employers may also need to bring additional governance and structure to the process of transferring pensions, as the act has introduced minor changes around limiting the risk of pension scams.
There are a number of steps employers should now take in response to the act, Saunders said, and employers with defined benefit schemes needed to be educating themselves on these new provisions now before they come into force in the autumn.
“It’s important employers have an internal governance process in place so people aren’t inadvertently doing things to trigger these regulations without knowing it, and are making sure the right people know about this,” he said. This includes keeping a paper trail to show discussions had and advice taken on pensions and to record measures taken to protect pension funds.
However, the act provides a framework for employers, and most of the detail will be set out in future regulations, said Carolyn Saunders, head of pensions and long-term savings at Pinsent Masons. “The first draft code of practice, published for consultation last year, was concerning for employers to the extent that the direction of travel seemed to be one that would be likely to lead to an increase in employer contributions,” she said.
The Pensions Regulator is expected to produce draft guidance for consultation which will explain how it will exercise its new powers.