How to prepare for the Pension Insurance Act
Additional provisions of the Pension Schemes Act 2021 are due to come into force in 2022 to protect the retirement savings of defined benefit (DB) savers. What does this mean for trustees, employers and savers and how can they prepare for it?
The new regulation for reportable events is the most urgent agenda item for system trustees and employers in their role as sponsors of DB pension systems.
A DB scheme provides employees with a retirement fund based on the number of years they have been a member of their employer’s pension scheme and their most recent or average salary. A defined contribution (DC) system provides savers with a pension fund based on the accumulation of the contributions they make during their employment along with their employer’s contributions.
Beginning April 6, 2022, the regime will require defined benefit employers to notify the Pensions Regulatory Authority (TPR) and scheme trustees when a “decision in principle” is made about certain corporate transactions, e.g. B. Selling a substantial part of their business or assets.
This aims to alert TPR to corporate activities that could result in an employer drawing on the Pension Protection Fund (PPF) in the event they become insolvent or if their scheme’s funding level falls below the PPF’s buyout level falls.
Employers must ensure they fully understand the definition of “decision in principle”, when it applies and how to approach potential corporate transactions accordingly.
“At the principal decision stage, assuming it’s just an agreement or a verbal agreement, it’s usually confidential and the employer doesn’t necessarily want to tell the trustees [the regulations are] The employer needs to let the trustees know earlier what could be a problem,” says Carolyn Saunders, director of pensions at Pinsent Masons.
If employers breach the new reportable event rule, they could risk exposing a wider range of workers to the recipients of TPR’s new criminal powers. The powers can be used on “any person” who has been shown to have put savers’ pensions at risk. This liability extends to third parties involved in a corporate transaction, including lenders and professional advisers.
“One of the challenges is the network of people [who could be held liable] is so broad and can affect people who are not involved in a system on a day-to-day basis,” says Leah Evans, Chair of the Pensions Committee at the Institute and Faculty of Actuaries.
Trustees and pension scheme managers should focus on raising awareness throughout their organization of the types of activities that TPR is likely to be notified of. You should encourage employees to ask questions at the beginning of any corporate transaction, particularly directors, chief financial officers, and treasury and corporate restructuring teams.
Mark Engelbretson is Pensions Manager at Network Rail, which operates two open DB systems. “For me, it’s all about challenging my assigned consultants, administrators, actuaries, investment advisors and systems lawyers when I’m running a project and looking at changes or update processes that we work on together to make sure we cover absolutely every part of the ground that.” we might be able to, and stress test different scenarios,” he says.
Trustees of DB systems are also awaiting the release of TPR’s second consultation on its new DB Incentive Code, which has been postponed to late summer. The first consultation outlined plans for a program-specific funding regime that would allow system trustees to opt for a “fast-track” path if their system assessment is compliant with the TPR Code guidelines. There is a “tailor made” route for trustees who cannot or do not want to comply with the earlier route. In such cases, supporting evidence would be required to illustrate how the trustees plan to manage additional risks to their system.
It is hoped that the second consultation will address the current lack of differentiation between open and closed DB systems, as open systems are likely to have a different investment strategy with a greater risk appetite.
“The fact is that new money and contributions and members are still flowing into a number of DB pension funds,” says Engelbretson.
Program trustees and sponsoring employers can prepare for this by ensuring they agree on a long-term program funding strategy that all stakeholders can participate in.
A new pension system, known as the Collective Defined Contribution (CDC), is expected to be introduced around the same time as the release of the TPR Funding Code Consultation. Scheduled to take effect August 1, 2022, CDC schemes will offer members and employers fixed contribution rates that are invested together, pooling investment and longevity risks.
Royal Mail has announced plans to launch its own CDC scheme known as the Royal Mail Collective Pension Plan, becoming the first UK company to do so.
Climate Change Regulations
From 1 October 2022, trustees of newly approved CDCs will be subject to the new Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021, along with trustees of DB schemes with assets in excess of £1bn.
The regulations require trustees to identify, manage and disclose in an annual report all climate-related risks and opportunities affecting their pension funds.
Known as the Taskforce on Climate-related Financial Disclosures (TCFD), fiduciaries are required to disclose information about the governance, strategy and risk management of their pension systems, as well as their metrics and targets, in the document. these should be published within seven months of the end of a program year.
The rules, which come into force on October 1, 2021, for trustees of larger DB pension plans with assets of 5 billion.
Further preparation is required for the phased implementation of pension dashboards, which will be rolled out from April 2023 to 2026. The dashboards aim to give savers online access to their multiple retirement savings, including their state pension, in one place.
This is likely welcome news for those involved in debates about the adequacy of savers’ pension funds, given concerns about the number of companies that have transitioned from DB to DC pension schemes for their workforce.
“If we have a large cohort retiring that can’t afford to retire, I think overall it’s going to come back more to the appropriateness, the provision of business, and maybe the balance between the private, the personal, and State directed its precautions,” says Evans.