Regulatory overload: is there such a thing as too much pensions legislation?

2021 saw an avalanche of new pensions legislation, consultations, guidance and codes of practice. From sweeping changes under the Pension Schemes Act 2021, which introduced significant changes to the Pensions Regulator’s enforcement and information gathering powers, to new regulations and guidance focused on delivering better value for members of defined contribution schemes, 2021 has certainly been a bumper year for new legislation.

The weight of all this new legislation has inevitably caused some capacity issues as pension scheme trustees and their administrators grapple with updating their processes, procedures and member communications.

These issues have been compounded by time limitations to prepare for some of this new legislation. For example, the regulations setting out significant new provisions to protect savers against pension scams introduced under the Pension Schemes Act 2021 (which included some notable changes from the draft regulations) were laid before Parliament on 8 November 2021 and came into force shortly afterwards on 30 November 2021.

Not a quiet year in pensions

In terms of things on the horizon, before the end of 2021, we are expecting draft regulations relating to the introduction of ‘pensions dashboards’ (an industry-wide system, expected from 2023, to enable individuals to access all of their pensions information in one place with the aim of supporting better planning for retirement).,

2022 will also see further regulations under the Pension Schemes Act 2021 introduce two new ‘notifiable events’ (i.e. events trustees and sponsoring employers of defined benefit schemes are required to notify the Pensions Regulator about). These new notifiable events will focus on material sales and granting or extending certain security.

The upshot of these new notifiable events is certain corporate plans will need to be divulged at a much more embryonic stage, and potentially numerous times. This will lead to additional complexity and is likely to have both timing and confidentiality implications. Compliance with the new requirements will need to be added to the very beginning of any corporate transaction plan and reviewed regularly.

While the drafting of the new regulations could change, as currently drafted, a defined benefit scheme’s sponsoring employer – and anyone associated or connected with it – will be on the hook to notify when main terms are proposed or there is a material change. Parent companies should take heed as they may be the only party in a position to notify in certain circumstances, being that much closer to the action. The regulations will also catch activities that financial institutions undertake in the ordinary course of their business, such as granting security in relation to derivatives and stock lending.

With commencement expected in April 2022, all employers with defined benefit pension schemes (not to mention the potential third parties mentioned above) should ensure these changes to the notifiable events regime are on their radar.

Significant changes to the defined benefit funding landscape are also expected, with regulations detailing a new requirement for defined benefit trustees to determine, with the agreement of sponsoring employers, a strategy for ensuring that scheme benefits can be provided over the long term. This new requirement is expected to dovetail with the Pension Regulator’s new defined benefit funding code of practice which is currently expected to come into force in late 2022.

Climate change will also continue to be a hot topic in 2022. October 2021 saw the first wave of new climate risk governance and reporting requirements for certain occupational pension schemes (master trusts and schemes whose net assets are £5bn or more). From 1 October 2022 schemes with £1bn or more assets will also need to follow suit and should already be gathering the necessary evidence.

There have been further changes over climate change, which could impact regulation over pensions, including:

·        DWP’s consultation launched on 21 October 2021 seeks views on adding a further metric to the existing climate requirements, requiring larger schemes and mastertrusts to report portfolio alignment with the Paris Agreement (an international treaty with the goals of pursuing, amongst other things, efforts to limit global average temperature to 1.5°C above pre-industrial levels, and making “financial flows” consistent with climate-resilient development);

·        The Pensions Regulator published a “climate change adaptation report” in October 2021. Noting that “pension schemes in the UK still have much work to do if they are to adapt to the challenges of climate change”, it recognises that “practices are evolving, and… a landscape of resilient pensions schemes that protect savings from climate risk is entirely within reach”. The Regulator will publish guidance clarifying what it will look for from schemes, and address climate change in modules of its new “single code”;

·        HM Treasury has also published a report entitled “Greening Finance: A Roadmap to Sustainable Investing”, outlining details on new “Sustainability Disclosure Requirements”. The roadmap sets expectations for the pensions and investment sector, including that schemes will use the information generated by the new disclosure requirements to move to align with a net-zero economy. The reporting standards are due to be consulted on in “early 2022”.

The new year is also expected to see the Pensions Regulator finally respond in full to its consultation on a new single code of practice (intended to be a consolidation and simplification of some of the Regulator’s current codes of practice). Following some pushback from the pensions industry, the Regulator is currently “carrying out a full review of the comments received on each of the modules”, with changes expected to the final code.

How much is too much?

More legislation usually means increasing complexity and in turn higher costs and more risk for those with responsibility for running pension schemes.

A recent survey by the Association of Consulting Actuaries suggests that 76 per cent of employers expect pension trustees to consider resigning due to the pace of change, with 88 per cent of employers expecting to struggle to convince people to take on the burdens of trusteeship in the future.

What might this mean for the pensions industry in the longer term? We can certainly expect to see the increasing governance burden continuing the trend of more schemes appointing professional sole trustees. A consequence of this will naturally be the loss of member representation on these trustee boards.

The increasing governance burden may also drive more schemes and their employers to consider consolidation of their defined benefit and defined contribution schemes with an increasing use of master trusts (both defined contribution and defined benefit) for the provision of future pension benefits and the management of legacy pension liabilities.

A further concern is whether there is capacity across the pensions industry to deal with this pace of change. It could reasonably be argued the industry is already stretched in dealing with the changes mentioned above (not to mention equalising for the effect of guaranteed minimum pensions, which is an ongoing issue for many schemes).

Another point worth considering is whether the ever-increasing disclosure burden on pension schemes has now become too much. Is there such a thing as providing members with too much information? Is it all necessary? Does anyone read it? On the other hand, it is arguable that the move to simpler DC annual benefit statements, expected in 2022, is at least a step in the right direction in this respect.

Amid all this new legislation, it is important not to lose sight of the main driver behind most of these legislative changes – ensuring better retirement outcomes for members.

Nigel Cayless is senior counsel at Sackers sackers.com