The Pension Schemes Act 2021 tells us what we always thought – “there is no free lunch”

Tackling climate change, Protecting pension pots and Funding Defined benefit (DB) schemes are the three key areas highlighted in the blog by David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at TPR (The Pensions Regulator).

Climate change

“Unfortunately, in this area, as in most if not all areas of life, there is no free lunch”, is the sentiment expressed by David Fairs about how to make the necessary changes to a low carbon economy using the powers given by the Pension Schemes Act 2021 (the Act). The Act highlights that pension scheme trustees engage more fully with the risks and opportunities arising from all responses required to solve this global emergency.

No longer can trustees consider climate change only when immediately affecting financially material. Trustees will need to put climate change at the heart of scheme governance, and the opportunities a transition to a low-carbon economy may bring.
All schemes are exposed to degrees of material risk from climate change – even those that have de-risked as there may be value impairment following policy responses by governments globally.
TPR continues to confirm that it will work closely with other regulators to ensure that climate change risk is properly priced into the system. A TPR climate strategy will be published in spring 2021 and how TPR can help trustees meet the challenges of asset value changes due to climate transition programs to create a more low-carbon use world.

Protecting pension pots

The Act provides a strong package of measures to deter against behaviour that risks savers’ benefits and drive better standards across pension schemes.

Information-gathering powers, together with new fixed and escalating civil penalties, are strengthened for TPR including being able to compel people to attend interviews and more powers to conduct inspections.

A civil penalty of up to £1 million has been introduced for those who:

  • deliberately provide false information to TPR or trustees, or
  • fail to comply with requirements under the notifiable events framework

New offences, with a potential seven-year jail term and unlimited fine, have been introduced for avoiding employer debt to a scheme or behaviour risking members’ benefits accrued under a scheme.

The Act also strengthens TPR’s contribution notice (CN) power. The Act introduces two additional tests. These will look, on a snapshot basis, at the impact of an act, or a failure to act, on:

  • the amount that would be recovered by the scheme in the hypothetical event of an employer’s insolvency – the employer insolvency test
  • the value of the employer’s resources relative to size of the scheme – the employer resources test

Funding Defined benefit (DB) schemes

The Act builds on the existing approach to DB funding and sets new requirements, which will help trustees focus on long-term planning and clarifies what is expected of schemes based on their own circumstances. TPR are to give increased focus on helping trustees navigate through the end game for their DB schemes.

To address the small number of schemes that abuse the flexibilities in the system, TPR will provide clarity of what is expected of trustees and employers in legislation, such as setting a long-term funding objective, a journey plan of how to get there and how risk should be managed along the way.
The second funding code consultation will take place in the second half of 2021.

Details of the blog of 16 February 2021 can be found at An act to protect pension savers | The Pensions Regulator Blog

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