Responding to news that the Pension Scheme Bill has, today, received Royal Assent, Samantha Brown, Regional Head of Employment, Pensions and Incentives at Herbert Smith Freehills, says that “the changes brought about by this much vaunted new Act contain the most significant reforms to the regulatory and funding regime for UK defined benefit occupational pension schemes since 2006.”
The most significant measures contained in the Act include the introduction of new criminal offences where directors and other parties take action which is construed as being materially detrimental to a defined benefit (DB) scheme.
Other key elements of the new legislation include:
- new regulatory powers, including the power for the Pensions Regulator to issue fines of up to £1 million on individuals or companies where there are material failings affecting a DB scheme
- new scheme funding requirements, including the need for DB schemes to set a legally binding long-term objective, and
- powers for the Government to introduce new governance and disclosure requirements relating to climate-related risks.
Brown continues: “Although the new criminal offences and regulatory sanctions are now on the statute books, they are unlikely to come into force until mid-2021 at the earliest. However, they will still serve as a wake-up call for directors of companies with DB schemes, as well as for lenders to and investors in such companies. Although the new sanctions have a noble aim – to protect the interests of DB scheme members – they could make it harder to restructure distressed sponsors of DB schemes, by limiting the scope for creative solutions to be found. In many ways, this could not come at a worse time.”
Alongside tougher regulatory powers and sanctions, the Act also contains a new statutory requirement for trustees and sponsors of DB schemes to set a long-term funding and investment target for their scheme and to set strategy in order to achieve this. It is expected that these new funding requirements will come into force in the second half of 2021.
Brown concludes: “The new funding requirements will fundamentally change the way the scheme funding process works. Going forwards, trustees and sponsors will need to agree a legally-binding long-term objective for their scheme and work backwards to put in place a funding plan enabling this target to be achieved. Rather than simply going through three-yearly valuation cycle, there will be much more focus from the Regulator on ensuring that schemes are on track to hit their long-term objective.”