Pensions: what’s new this week 4 October 2021

• Pension Schemes Act 2021: new regulatory powers, sanctions commence; new TPR guidance
• PPF consults on draft levy rules 2022/23
• Latest guidance on GMP equalisation
• DC investment: new report on productive finance, TPR blog post
• Climate change, stewardship and pensions: new Parliamentary report
• Latest HMRC newsletter
• Small pots: industry group reports on progress

Pension Schemes Act 2021: new regulatory powers, sanctions commence; new TPR guidance

Extensive new powers and sanctions for the Pensions Regulator (TPR) came into force on 1 October:

• new criminal offences and financial penalties (of up to £1 million) for avoidance of employer debt, conduct risking accrued scheme benefits and failure to comply with a contribution notice (CN);
• changes to the CN framework (including the new employer insolvency and employer resources tests);
• new information-gathering powers for TPR;
• increased penalties for failure to comply with the existing notifiable events framework; and
• new sanctions around the provision of false or misleading information to TPR and pension scheme trustees.

TPR has now published long-awaited guidance on its new regulatory powers and sanctions, including updated CN guidance (see further below), and its final policy on investigating and prosecuting the new criminal offences of avoidance of employer debt and conduct risking accrued scheme benefits. Although the policy provides a clearer indication of TPR’s approach to the criminal offences, further guidance on key areas is still to come. As a minimum, trustees of DB schemes should be aware of the new offences and CN tests and when these might apply, as part of their trustee knowledge and understanding – if you would like to arrange training, please contact your usual A&O adviser.

Criminal offences policy and further consultation

The criminal offences policy has been significantly updated from the consultation version, including:

• new guidance on ‘reasonable excuse’, including new/updated examples and high-level guidance on common behaviours and activities (such as employer debt easements); and
• an extended case study (based on simplified facts) considering how TPR would assess the conduct of a (now insolvent) sponsoring employer, its parent company, an arm’s length customer and lenders.

The policy does not provide express guidance for trustees, other than in relation to employer debt easements. However, TPR emphasises that it intends to ‘investigate and prosecute the most serious examples of intentional or reckless conduct that were already within the scope of our contribution notice power, or would be in scope if the person was connected with the scheme employer.’

Read the criminal offences policy and related consultation response.

TPR has yet to confirm its position on key elements of its new powers, including the new financial penalties of up to £1 million, and its approach where it has both civil and criminal enforcement powers. TPR has launched a further consultation on policies in the following areas:

• situations where TPR has overlapping criminal/civil enforcement powers;
• monetary penalties covering the new financial penalties of up to £1 million; and
• TPR’s approach to using its information-gathering powers, including related sanctions.

The consultation closes on 21 December 2021, meaning the final versions of these new policies will not be published until 2022.

Read the consultation.

Contribution notices and clearance

TPR has also published:

• a revised version of its clearance guidance; and
• a draft version of the updated code of practice 12 on contribution notices and the associated code-related guidance, plus the related consultation response. The existing code of practice remains in force for the moment; the draft code will replace it on a date to be appointed.

TPR has emphasised that clearance relates only to its moral hazard powers, not to the criminal offences. If a party obtains a clearance statement in relation to a particular act, this will not automatically mean that the person has a reasonable excuse for the purposes of the offences (but a recipient of a clearance statement might seek to rely on the mitigation described in their application in arguing that they have a reasonable excuse).

The updated code of practice and guidance on TPR’s extended CN powers set out details of the new ‘employer insolvency’ and ‘employer resources’ tests. Alongside the existing material detriment test and a separate test relating to avoidance of employer debt, these can be used to require additional payments to a DB pension scheme. The new tests focus on the effect of an act/omission on an employer and its capacity to support the scheme, due to the impact on either (a) the value of the employer’s resources, relative to the scheme’s deficit or (b) the hypothetical insolvency outcome for the scheme. The guidance sets out examples of circumstances in which the various CN tests might/might not be engaged, including different acts that may reduce the employer covenant or weaken a scheme’s creditor position.

PPF consults on draft levy rules 2022/23

The Pension Protection Fund (PPF) is consulting on its 2022/23 levy rules. The PPF intends to set the levy estimate at £415 million and to leave the levy scaling factor, scheme-based multiplier and risk-based levy cap unchanged. The PPF predicts that over 80% of schemes will see a reduction in the levy from 2021/22, but that some schemes will see significant levy increases where there has been a worsening in the sponsor’s insolvency score (2% of schemes may see a doubling of their levy).

The PPF is proposing changes to its rules for consolidators and schemes without a substantive sponsor (labelled as the rules for alternative covenant schemes), and otherwise only very limited changes to its rules. It has published for consultation draft versions of the determination, transfers appendix, alternative covenant scheme appendix and guidance for alternative covenant schemes. The consultation document also notes that the disapplication of the compensation cap:

• has potential implications for schemes carrying out s179 valuations – the PPF intends to issue updated s179 valuation guidance later in the year clarifying the position; and
• has ancillary impacts on certain documents which have not been published as part of this consultation, but will be updated and published when the determination is finalised.

The consultation closes on 9 November 2021.

Read the consultation.

Latest guidance on GMP equalisation

PASA’s GMP Equalisation Working Group has published the following new guidance:

• Member communications at the implementation stage – this is a further set of communications guidance for schemes, following guidance published last year on communications at the early planning stage.
• Anti-franking – this guidance considers the interaction of anti-franking and GMP equalisation, and discusses three potential techniques for applying anti-franking in the GMP equalisation context.

Read the member communications guidance and the anti-franking guidance.

DC investment: new report on productive finance, TPR blog post

New recommendations have been published on removing barriers to investment in less liquid assets by DC pension schemes, and on shifting the focus from cost to long-term value. The aim is to facilitate greater investment in UK ‘productive finance’, including venture capital, private equity and infrastructure. The report by the Productive Finance Working Group (chaired by HM Treasury, the Bank of England and the Financial Conduct Authority) recommends that trustees should, where appropriate:

• actively consider how increasing investment in less liquid assets could generate better value for their members; and
• monitor long-term returns using robust metrics.

The report contains other recommendations, including in relation to the charge cap, consolidation of DC schemes, and market changes (such as the Long-Term Asset Fund).

Read the report.

TPR has responded to the report with a new blog post on DC ‘investing for the future’. Whilst it is supportive of the report and notes that innovation in the DC market is required, TPR sounds a note of caution: trustees have fiduciary duties and should only invest in any asset if, having taken appropriate advice, they believe that this is in members’ interests. TPR plans to produce further guidance for trustees on illiquid investments next year.

TPR is also calling for active engagement by trustees, consultants and investment managers to drive investment and risk management innovation in the DC market, and to accelerate the transfer of skills and innovation from DB to the DC market.

Once these industry developments lead to new investment opportunities, TPR expects trustees to consider whether they would be appropriate for their scheme, and to be prepared to demonstrate to members that they have considered the full range of investment opportunities, in the context of potential future outcomes for members, and not just in the context of costs. Where trustees do not consider that they have the scheme scale or governance capacity to consider these (future) investment opportunities, TPR also expects them to consider whether consolidation might be appropriate.

Read the blog post.

Climate change, stewardship and pensions: new Parliamentary report

Ahead of COP26 this November, the Work and Pensions Committee has published its related report on pension scheme stewardship, which makes a number of recommendations, including:

• TPR should continuously monitor and update detailed guidelines for trustees on how to consider the effects of climate change on members;
• TPR should provide a definition for net zero alignment, and establish a working group to develop guidance for schemes looking to set net zero targets;
• the government should consult on whether there is a case for mandating that default arrangements in DC schemes used for auto-enrolment should align to government climate goals; and
• the government should publish the steps it is taking to ensure that its policies do not incentivise divestment over good stewardship (but stating that schemes could consider divestment when there is no other option).

The government is expected to respond to the report in due course.

Read the report.

Latest HMRC newsletter

HMRC’s latest Pension Schemes Newsletter (no. 133) includes information on reporting multiple small pots payments, as well as updates for schemes operating relief at source and on the migration of pension schemes to the Managing Pension Schemes service.

Read the newsletter.

Small pots: industry group reports on progress

An industry working group considering solutions to the proliferation of small, deferred pensions pots has published its first progress report. The group has been considering administrative issues associated with small pots, as well as further exploring potential solutions to the small pots issue.

Read the report.