UK Pension Scheme Bill provides welcome changes to industry

Rebecca Howard and Stephen Scholefield, pensions law experts at Pinsent Masons, were commenting on the new bill (114 pages/5.6 MB) recently introduced to parliament. The bill promises to overhaul the UK’s pension landscape and deliver better value for millions of savers. The bill, as part of the government’s broader ‘plan for change’, is expected to benefit millions by facilitating consolidation, improving returns and governance, and boosting long-term investment in the UK economy.

In the defined benefit (DB) sphere, an important change will allow trustees and employers to unlock surplus funds more easily to benefit employers. The government’s hope is that this will encourage schemes to run-on, where appropriate to do so, rather than transferring to insurance solutions, and that this will increase investment in the UK economy and boost business productivity, as well as encouraging improvements to member benefits.

Howard said: “Employers will also welcome key changes in the bill including news that restrictions preventing the Pension Protection Fund (PPF) from further reducing its annual levy will be relaxed, easing unnecessary financial pressure on sponsors of DB schemes across the UK.”

The bill provides for the Pensions Ombudsman to make enforceable determinations in pensions overpayment cases without requiring a county court order, or sheriff court order in Scotland, to sanction recoupment.

Scholefield said: “Trustees will be relieved to see this element of the bill. When these provisions take effect, schemes will be able to recover overpaid funds in a more timely manner, with no reduction in member protection, and remove additional costs arising from the court process.”

The bill also provides a long-awaited legislative framework for DB ‘superfunds’, which are currently operating on a temporary authorisation regime set out in guidance from the Pensions Regulator. “Such legislative certainty may encourage further development of the superfund market, providing new opportunities for the future of DB provision,” said Howard.

Additional changes will impact many defined contribution (DC) schemes, as the government moves forward with plans to build scale in the pensions industry with the aim of stimulating UK investment. The bill will require multi-employer DC schemes, subject to certain exceptions, to have at least £25 billion of assets in their main default arrangement by 2030 or be en route to achieving that scale by 2035 through having £10 billion in their main default by 2030.

The bill will also see members’ small pots of £1,000 or less automatically transferred to their largest pot, helping members to keep track of their pensions and reducing the risk of their pots being eroded by charges.

Additionally, the introduction of the value of money framework is being considered a positive step forward, encouraging a shift in focus from cost to overall value. The effectiveness of this framework will be determined by the detail of its reporting requirements.

The final “landmark” change for DC schemes is a requirement for the provision of one or more default pension benefit solutions. While members will retain the full range of retirement options provided by the 2015 pension freedoms, there will now be a default solution or solutions available to those who cannot, or do not wish to, make their own choice.

“This should help to mitigate the additional risk placed upon members by pension freedoms, where they currently have to navigate complex pension options and their associated tax consequences with often minimal advice or guidance,” said Howard.

In addition to the levy, there are also other changes for the PPF. For example, the definition of “terminal illness” in the PPF and financial assistance scheme (FAS) legislation has been extended so that eligible members who are diagnosed as terminally ill can receive payments at an earlier stage of their illness. This is consistent with other pension arrangements. Changes are also being made to facilitate PPF and FAS information being displayed on the government-backed pensions dashboard service.

The Pension Schemes Bill will now proceed through the legislative process, with debates and potential amendments expected in the coming months.

Scholefield said: “The scale and ambition of these changes should not be underestimated. Businesses will have an integral role to play in shaping the bill as it progresses through parliament, and particularly the regulations and guidance that will follow in due course and provide the detail of the new regimes.”