Pensions snapshot - April 2021
This edition of snapshot looks at the latest legal developments in pensions.
The topics covered in this edition are:
- Pensions Regulator consults on criminal sanctions policy for new criminal powers under Pension Schemes Act 2021
- DWP consultation on regulations to expand The Pension Regulator's powers
- The Regulator consults on a single code of practice
Pensions Regulator consults on criminal sanctions policy for new criminal powers under Pension Schemes Act 2021
The Pensions Regulator (the Regulator) has issued a consultation in relation to its policy for imposing criminal sanctions under the new Pension Schemes Act 2021 (PSA 2021).
Notably, the PSA 2021 introduces the following two new criminal offences:
- offence of avoidance of employer debt; and
- offence of conduct risking accrued scheme benefits.
Committing one of these new offences will lead to a person becoming liable on conviction to a fine and/or imprisonment for up to seven years, or both.
The draft criminal sanctions policy published for consultation notes that the Regulator’s approach to the prosecution of the new criminal offences will be closely aligned to its current powers to issue a contribution notice (CN) i.e. it would look to prosecute under the same circumstances as it would currently issue a contribution notice. The policy does note, however, that there may be scenarios where the Regulator decides not to pursue a CN but where it may still consider prosecution as a deterrent. The draft policy notes that the six year period for issuing a CN does not apply to the new criminal powers.
The draft policy does set out examples of when the “reasonable excuse” defence will apply. These include whether the detrimental impact or likelihood of benefits being received in full is an incidental consequence of the act or omission and the adequacy of mitigation provided to offset the detrimental impact. The burden will be on the prosecution to prove the absence of a reasonable excuse.
Clearance will not apply to the new criminal offences and the Regulator has noted that it will be “mindful of policy intent behind the new offences” when selecting cases for prosecution.
The consultation is open for six weeks and will close on 22 April 2021. The draft policy re-affirms the wide-ranging scope of the Regulator’s new powers but, in its present form, provides only scant comfort to stakeholders as to how the new criminal powers are intended to apply.
DWP consultation on regulations to expand The Pension Regulator's powers
The Department of Work and Pensions (DWP) is now consulting on regulations which it intends to issue to expand the Regulator's enhanced powers under the PSA 2021, both in respect of the CN tests and its information gathering powers.
The circumstances in which a CN may be issued (i.e. requiring the target to pay money toward the affected pension scheme) have been expanded. Two new tests have been introduced:
- the ‘employer insolvency’ test; and
- the ‘employer resources’ test.
Where these tests are met, the Regulator would consider whether it is reasonable for it to issue a CN. The employer insolvency test assesses whether, if a hypothetical section 75 debt arose (under section 75 of the Pensions Act 1995), the act or omission in question would reduce the amount of that debt anticipated to be recovered by the pension scheme. The employer resources test, which is being consulted on now and is (arguably) the more complicated and controversial test, assesses whether the act or omission materially reduces the resources the employer would have relative to the estimated section 75 debt.
The DWP proposes that the employer’s resources be ascertained by reference to the ‘normalised profits of the employer before tax’. The Regulator would use the latest accounts from before the act or omission (while excluding ‘any exceptional or non-recurring items’) compared with the position after the act or omission occurred. This would be calculated by the Regulator using subsequent accounts or management accounting information. The DWP acknowledges that the proposed test is not perfect, it is subjective (with the Regulator determining the outcome based on available information, particularly where there are no available accounts) and will likely provide ‘uncertainty for the market’. Nevertheless, the DWP approves of its simplicity and argues that it is still better than alternatives which it has considered.
Also, as part of the PSA 2021, the Regulator’s information gathering powers have been brought together in a more consistent way. The draft regulations which will underpin these investigative powers include:
- the power to compel an individual’s attendance at interviews with the Regulator (previously the interview powers were limited to automatic enrolment and master trust compliance);
- extending circumstances where the Regulator’s investigators can enter premises; and
- new penalties for failing to co-operate with the Regulator.
The regulations will also confirm that the Regulator should be able to apply its inspection powers in the same way for multi-employer schemes as it does for single employer schemes. The new financial penalty system for non-compliance by employers would be an escalating penalty, with £500 applying on the first day, increasing cumulatively by £500, with a daily rate of £10,000 after 20 days. Escalating penalties for individuals will be £200 each day. As regards fees for fixed penalties, these are anticipated to be £400 - the same level as for auto-enrolment non-compliance.
The consultation period commenced on 18 March and runs until 29 April 2021 (a week after the consultation on the use of criminal powers closes), after which a consultation response will be published, and the regulations finalised. It is anticipated that the new information gathering powers will come into force on 1 October 2021.
The Regulator consults on a single code of practice
The Regulator has published a consultation on a new single code of practice which updates and consolidates 10 of the 15 existing codes of practice into one document. The single code also implements requirements of the second European Pensions Directive (transposed into UK legislation in the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018) for schemes to have an "effective system of governance" proportionate to their size, nature, scale and complexity.
The Regulator's aim in moving to the single code is to make it easier for trustees to access and understand the Regulator's expectations. The single code will also remove duplicate and out-of-date content and will be significantly shorter than the current codes.
The majority of the content of the draft single code will be familiar to trustees because it is taken from existing codes of practice. However, the content is now split into topic-based modules intended to be web-based and easier to use than the current codes. Together, the modules set out the Regulator's minimum expectations of an effective system of governance.
New requirements applying to private sector schemes with 100 or more members include:
- a requirement to establish and publish a remuneration policy for setting the levels and means for remunerating individuals who run the scheme and carry out key functions; and
- a requirement to carry out an "own risk assessment" to assess the effectiveness and risks of the scheme's system of governance. This will need to be carried out and documented within 12 months of the new single code coming into force.
The Regulator has also incorporated some existing guidance on cyber security into the single code. It hopes this will reinforce its expectations following survey data which showed that it is still rare for schemes to have adequate cyber security processes in place.
Five codes of practice are not included in the current draft single code: notifiable events, funding defined benefits, modification of subsisting rights, circumstances in relation to the material detriment test and authorisation and supervision of master trusts. These will be added in later phases. The current draft also does not include any changes brought in by the PSA 2021 and updates will therefore be needed as those changes are brought into force.
It will be a significant exercise for trustees to review the single code and identify any gaps in their scheme's processes and policies that need to be addressed once it comes into force, particularly for schemes that need to carry out an own risk assessment. Trustees may find that they are already implementing many of the Regulator's expectations, but the consultation emphasises that the existence of "tick-box" policies and processes is not enough and trustees will instead need to assess whether those policies and processes are functioning as intended. Trustees might find it useful to start preparing for this exercise now by allocating resource and considering what input they will need from their advisers.
Absence of HMRC guarantee that a receiving scheme is a QROPS is not a relevant factor to refuse a transfer.
In this case Mr Y ‘s complaint about a scheme’s refusal to make a transfer to a qualifying recognised overseas pension Scheme (QROPS) was partially upheld by the Pensions Ombudsman.
Mr Y held three UK-based pensions that he wished to consolidate and transfer to Jersey. One of those was held in an occupational defined benefit scheme.
Mr Y requested a transfer value from that scheme which the scheme administrators, Barnett Waddingham (BW), provided with a request that enhanced due diligence forms be completed and returned.
The statutory transfer request was referred to the trustees for a decision. The trustees decided that they could not determine whether the receiving scheme was a QROPS and so refused the transfer request. This was not due to the absence of supporting information but because HMRC would not guarantee that the QROPs was on its list. The refusal based on this amounted to maladministration. Mr Y should not have also been asked to pay for any extra due diligence.
In this case there was supporting evidence and the absence of an HMRC guarantee should not have been a relevant factor to refuse the transfer.
The Pensions Ombudsman determined Mr Y should receive £1,000 for the serious distress and inconvenience caused and required the trustees to determine whether the receiving scheme was a QROPS. The case is a good reminder that, in relation to statutory transfer requests, there needs to be a good reason to refuse.