37: Pensions law – What to expect in 2021
After a year dominated by COVID-19, we are likely to see far more regulatory, legislative and policy measures coming into force in 2021, although given the extended lockdown further delays cannot be ruled out. UK pension schemes will need to consider the impact of Brexit on employer covenant, investments and data sharing but there are plenty of other changes coming up this year that will affect trustees and sponsoring employees, with a continuing focus on governance, long- term planning, consolidation and ESG issues.
Pension Schemes Bill
The Pension Schemes Bill is due to receive Royal Assent and become the Pension Schemes Act 2021 within the next few weeks, although many of its provisions will not come into force for many months due to the need to finalise details in further consultations, guidance and regulations. The Act will define many of the most important pensions developments in 2021 and beyond, including strengthened powers for The Pensions Regulator (TPR), new criminal offences and civil sanctions to tackle wilful or reckless behaviour by employers, pensions dashboards, new requirements to take climate change into account, and changes to the funding regime for DB schemes. Some of these issues are mentioned below, but we will also be looking at key aspects of the Bill in future blogs.
DB scheme funding
A further consultation on TPR’s new DB funding code of practice is expected later this year. The code sets out a prescriptive fast-track funding process or an alternative bespoke approach and requires DB schemes to give greater priority to long-term objectives. This code will sit alongside the new requirements in the Pension Schemes Bill for trustees to set a long-term investment and funding strategy and to publish an annual statement confirming whether this strategy is being successfully implemented. Although the revised code was due to come into force at the end of 2021, this may now be pushed into 2022.
Pensions dashboards will enable individuals to view all their pensions information on one online platform. The Pension Dashboards Programme has published its first usage guide for data standards and will complete procurement for the digital architecture during 2021. Although schemes are unlikely to be required to participate in pensions dashboards until 2023, they should be taking steps now to ensure their data will be ready.
Climate risk governance
The increasing focus on ESG issues, sustainability and climate-aware investment will continue this year. There is already a requirement for trustees to report on the extent to which they have taken into account ESG factors in their investment decisions. New regulations, with accompanying statutory guidance, will require large pension schemes (£5 billionn plus) and authorised DC master trusts to assess and report on climate-related risks from October 2021, with smaller schemes (£1 billion plus) coming in scope in October 2022. A possible extension to all remaining schemes will be reviewed in 2024.
Simpler annual benefit statements
The government is planning to consult on draft regulations early in 2021 to clarify the format of simpler, standardised annual benefit statements for DC auto-enrolment schemes, as well as a mandatory approach to the timing of these statements. Trustees of other schemes should note that the government may also consult on a similar approach for all annual benefit statements.
Increase in General Levy
The DWP’s consultation on proposals to change the structure and rates of the general levy, paid by pension schemes to cover the cost of funding TPR, the Pensions Ombudsman, and part of the Money and Pensions Service, closes on 27th January 2021. If levy rates remain unchanged, the DWP estimates that there will be a deficit of around £230 million by April 2024. Various options are proposed, with the government’s preferred approach being to increase and realign rates to reflect the different levels of supervision required for different types of scheme (DB, DC, Master Trusts and Personal Pensions). Given the current economic climate, the DWP proposes only moderate increases in rates for 2021 / 22, at 10% for DB and DC schemes and 5% for master trusts and personal pension schemes. However, higher rates would apply in subsequent years, with the largest rises payable by DB schemes because of their relative complexity.
Single TPR code of practice and revised TKU code
TPR’s current 15 codes of practice will be combined to form a new single code, to be published in draft for consultation early this year. The new code is likely to be developed in phases, with first priority given to internal controls, the DC code, public service schemes and master trusts. Trustees will be required to demonstrate that they have an effective system of governance within 12 months of publication of the updated code. Consultation on changes to TPR’s trustee knowledge and understanding (TKU) code of practice and guidance is also due to be published in 2021. Similarly, this will include amalgamation of the current TKU codes of practice into a single code.
In 2021, trustees should be in a position to address the challenges of finalising their GMP equalisation strategy. It is over two years since the landmark decision in the Lloyds Bank case that trustees of schemes that were contracted out on the salary-related basis between 1990 and 1997 must adjust benefits for the unequal effect of GMPs. A further High Court judgment in November 2020 confirmed the need to revisit historic transfer value payments and we expect many schemes to be working on paying top-ups in 2021. The Pensions Administration Standards Association continues to issue practical guidance on equalisation and schemes can only hope for some further definitive statements from HMRC on the tax implications of equalisation through GMP conversion.
DC consolidation and DB superfunds
The theme of consolidation will continue. More onerous reporting and governance requirements for DC schemes from 5 October 2021, the need to demonstrate value for money for pension saves as well as increasing pressure to improve member outcomes will drive the trend to winding up DC schemes or DC sections of hybrid schemes and transfers to master trusts. In addition, with the interim regulatory regime for assessing and supervising DB superfunds now in place (pending detailed legislation), superfund transactions are also likely to start up in 2021.