The Pension Schemes Bill has received Royal Assent today, creating new laws covering areas including defined benefit (DB) scheme protections, pensions dashboards and climate change.
Tom Selby, senior analyst at AJ Bell, comments:
“It’s been a long road but after two years of at times fractious Parliamentary debate the Pension Schemes Bill has become law.
“The Act, in the words of pensions minister Guy Opperman, brings into force a raft of new measures designed to make Brits’ pensions ‘safer, better and greener’.
“These include tougher punishments for bosses who neglect their responsibilities to members of generous DB schemes, legislation enabling the creation of pensions dashboards and new rules around climate change reporting for defined contribution (DC) schemes.
“In addition, rules contained in the Act will allow new collective defined contribution (CDC) schemes to be created in the UK, while there is also an emphasis on protecting savers from the growing scourge of pension scams.
“Taken together these interventions will have a profound impact on the UK retirement landscape, with individuals, as well as trustees and companies running pension schemes likely to be affected.”
Protections for DB scheme members
“The Government has responded to the high profile failure of a number of DB pension schemes – and particularly the case involving former BHS boss Sir Phillip Green – by handing The Pensions Regulator (TPR) tough new enforcement powers, including fines of up to £1 million for individuals who knowingly neglect their responsibilities to members.
“It is not clear exactly how this might play out in practice, and in particular whether it will be possible to prove an employer has knowingly neglected its DB scheme.
“Many will therefore argue this is an example of the Government bolting the stable door long after the horse has bolted.
“However, this tougher regime should help place dealing with DB pensions closer to the top of corporate agendas and ensure past scandals are at least less likely to be repeated.”
Pensions dashboards
“The Act legislates for the creation of pensions dashboards which, once up and running, should allow members to see all their retirement pots in one place, online. This is deemed necessary to help people locate lost pension pots and make it easier for savers to plan for retirement.
“There has been much debate over both the timeline and coverage dashboards should aim for.
“Getting dashboards off the ground is a monumental undertaking involving industry, Government and regulators. Ensuring people can trust the information they see is accurate and complete is absolutely vital, as is protecting the system from the claws of fraudsters.
“The decision to push back the launch of dashboards until 2023 felt sensible given the complexities involved, particularly in relation to including DB schemes and older-style pensions.
“In a world where workers tend to have multiple employers throughout their careers and build up pensions with different providers, enabling them to find all these pensions quickly is clearly a laudable aim. If delivered successfully these dashboards could help spearhead a revolution in pensions engagement.”
Climate change reporting
“Environmental, social and governance (ESG) investing has elbowed its way firmly into the mainstream, with the likes of David Attenborough and Love Actually director Richard Curtis pushing pension schemes to ‘go green’ as part of the battle against climate change.
“The reason for focusing on pensions is simple: scale. Total private pension wealth in the UK is estimated to be north of £6 trillion, while automatic enrolment is bringing millions of new savers into the system – many of whom would rather their money be invested in a way which doesn’t damage the planet.
“If this money can be marshalled effectively, it could fundamentally alter the way companies desperate for that cash behave.
“The Act will place a new emphasis on schemes to consider the climate change impact of the investments they make on behalf of members and publish information for members on how this has been achieved.
“Over the longer-term we expect savers to take a much keener interest in how and where their retirement pots are invested, so there is every chance firms will need to go above and beyond these requirements to satisfy members.”
Restricting the statutory right to transfer
“In the ongoing fight against scams the Government wants to introduce a new ‘red flag’ warning system when someone puts in a request to transfer their pension.
“This would be designed to ensure that, where certain suspicious actions are detected by a provider, additional questions and due diligence is carried out to ensure the scheme is legitimate. If these questions are not satisfied, the provider will be able to block the transfer.
“While this action is welcome there are two notes of caution. First, in designing red flags the DWP will need to be careful not to hold up transfers to legitimate schemes – a process which the industry as a whole is rightly under pressure from the regulator to speed up.
“Second, the reality is that most pension scams are now focused on people aged 55 and over, rather than on those transferring and keeping their money within the tax wrapper.
“As a result, the impact of these changes on the overall incidence of scams is likely to be limited.”
Collective defined contribution (CDC) schemes
“The Act enables collective defined contribution, or CDC, schemes to be created in the UK.
“These schemes are designed to offer a ‘third way’ between guaranteed DB pensions, where all risks are shouldered by the employer, and DC, where risks are shouldered by the member.
“Under CDC the employer and employee contribute to a collective fund from which the employee draws a retirement income. The funding risk is shared collectively, in a similar way to old-style with-profits pensions.
“The debate around CDC provision has been burning for years, dividing opinion among both politicians and the pensions industry. The most ardent supporters often paint a picture of retirement mecca, with CDC savers benefiting from bigger pensions and lower investment volatility.
“On the other side, detractors argue the schemes risk becoming an albatross around the necks of the next generation, with sons and daughters asked to make bigger contributions to pay for their parents’ pensions.
“The Government believes models of CDC can be created which address this intergenerational fairness issue, although it remains to be seen where demand for such pensions will come from. So far Royal Mail has committed to offering CDC to its members in place of its DB scheme.”
