The Pension Schemes Act 2021

The Pension Schemes Act 2021 received Royal Assent on 11 February 2021 and will impose more regulation on the operation of defined benefit schemes. It will see TPR gain additional powers and introduce severe penalties for wrongdoing.

The Pension Schemes Act 2021 (the Act) is being described as the most significant event in relation to pension scheme funding since the Pensions Act of 2004. Whilst the new Act covers many pensions matters, the main issues which impact the funding of defined benefit schemes are as follows.

• A legally binding long-term funding target;
• TPR has increased powers to issue Contribution Notices;
• The Notifiable Events regime is strengthened with the “declaration of intent”, the purpose of which is to inform trustees of schemes ahead of corporate events; and
• Penalties for schemes “put at risk and not able to function as they did in the past” have been broadened to include criminal offences (with imprisonment terms) and more robust civil penalties

Funding and investment strategy

A formal document will need to be submitted to TPR setting out the trustees’ funding and investment strategy. This will require targets to be set on the journey to full funding and the investments which will be held as the journey plan progresses

Once agreed, any revisions to this strategy will need to be set out in writing and submitted to TPR giving details of performance against the current strategy, the risks faced by the scheme and how the trustees intend to mitigate them, and a reflection by the trustees on previous decisions taken.

Contribution Notices

The Act extends TPR’s power to issue Contribution Notices with two new tests, the Employer Insolvency Test and the Employer Resources Test

The Employer Insolvency Test concerns an act or failure to act that would have resulted in an underfunded scheme recovering a lower amount from the employer, had the employer suffered an insolvency event immediately after that act or failure to act

The Employer Resources Test concerns an act or failure to act that materially reduces the resources of an employer. The materiality of the reduction in the employer’s resources is measured by reference to the magnitude of the estimated solvency deficit at the time of the act or failure to act.

Declaration of intent

The Notifiable Events regime is broadened by a new requirement for certain corporate events and transactions to be notified “as reasonably as practicable” to trustees and TPR so that any impact to scheme funding can be properly assessed

Our view

The impact of the new Act will become evident over the coming year, especially when TPR issues regulations and guidance in relation to its implementation

Inevitably, a significant issue will continue to be the funding of schemes in an environment in which there may be greater pressure on sponsors to pay higher cash contributions over a shorter time frame

If you would like to discuss further any of the above, please do not hesitate to contact one of the team at PCS