When to approach the Pensions Regulator
In some circumstances persons involved in operating or advising occupational pension schemes must provide information to the Regulator (TPR). We look below at when it may be necessary for trustees, sponsors, advisers or service providers to approach TPR, from routine reports on scheme compliance to more urgent matters, such as a breach of the law or a material payment failure. The government is also planning a consultation later this year on new notification obligations: read more.
Routine compliance with pensions obligations
There are regular occasions when specific information must be provided to TPR. TPR also has a broad general power to require information from anyone it believes is likely to hold information relevant to the exercise of its regulatory functions, including trustees, employers and professional advisers. In 2018, TPR announced a new regulatory approach under which schemes can expect more supervisory interaction, including one-to-one supervision for the biggest schemes in the UK. Click here to read more about the current approach.
Trustee boards are required to provide certain information to TPR, and to ensure that this information is kept up to date. This includes scheme contact details and information about the pension scheme’s status and membership profile1. Where there is a change to any of this information, trustees must tell TPR as soon as reasonably practicable via its online scheme maintenance system, Exchange.
Trustees of defined benefit (DB) schemes must send TPR copies of various scheme funding-related documents, including the schedule of contributions and any recovery plan. If agreement cannot be reached between the trustees and employer on the methods and assumptions for calculating the technical provisions, or on the contents of the statement of funding principles, the recovery plan or schedule of contributions, then trustees must notify TPR of this fact as soon as reasonably practicable, otherwise they may face a fine.
Most schemes receive an annual scheme return notice from TPR, and must then complete and submit the return using Exchange before the deadline. Trustees should keep a hard copy of the form for future reference. The scheme return asks for basic scheme information such as contact details for the scheme’s trustees and any associated employers, details on the type of scheme and its membership, DB-specific information (such as valuation information) and information in relation to defined contribution (DC) benefits, such as details on the default strategy. TPR may change the information requested; it provides a checklist of new information each year. The scheme return allows TPR to monitor regulatory requirements, such as the requirement for DC schemes or sections to produce a Chair’s statement.
The information in the scheme return is also used for Pension Protection Fund (PPF) levy purposes, which can be updated on Exchange at any time up to the PPF’s deadline.
Employers are required to automatically enrol eligible workers into a workplace pension arrangement, and to pay mandatory minimum contributions. TPR is charged with ensuring employers comply with their obligations. An employer must complete an online declaration of compliance to let TPR know how it has met its legal duty for automatic enrolment within five months of the employer’s staging date. Employers are obliged to re-declare their compliance every three years. Click here to read more about auto-enrolment.
Breaches of the law
The scope of the duty to report
Trustees, scheme employers, pension scheme administrators and advisers may all be required to report breaches of the law to TPR, to enable TPR to fulfil its responsibilities and achieve its objectives effectively. This duty is commonly referred to as ‘whistle-blowing’. Not every breach needs to be reported.
The duty arises where a reporter has reasonable cause to believe that:
- a duty imposed by law (including legislation, trust law and the scheme’s rules) which is relevant to the administration of the scheme has not been, or is not being, complied with; and
- this failure to comply is likely to be of material significance to TPR.
‘Reasonable cause to believe’ means more than a mere suspicion – for example, a reporter may need to check what has occurred against the law and TPR’s relevant Code of Practice in order to form an initial view.
It is not necessary to search for breaches, but those involved in operating and advising occupational pension schemes should have an effective procedure in place to identify and evaluate breaches when they do occur. It is worth noting that TPR interprets ‘administration’ widely in the context of breaches of the law. This is not limited to the scheme administrative function, but also extends to such matters as scheme funding, investment policy and management, the custody of invested assets, and anything which could potentially affect the ability of members to access their benefits or information to which they are entitled.
When deciding if a breach is likely to be of material significance, the reporter should consider:
- the cause of the breach – for example, breaches caused by dishonesty, poor governance or inaccurate advice are more serious than inadvertent errors.
- the effect of the breach – for example, does it affect funding, the security of assets or the allocation of members’ contributions?
- the reaction to the breach – has prompt and effective action been taken to remedy the breach and its causes and, where appropriate, to notify members whose benefits are affected?
- the wider implications of the breach – does it highlight a broader issue such as a system failure that may affect other schemes, or a lack by the trustees or administrators of adequate knowledge and understanding to fulfil their responsibilities?
TPR’s whistle-blowing guidance groups events by a traffic light system to help determine if a report needs to be made.
The timeframe for reporting a breach of law
A report to TPR about a breach of the law must be made as soon as reasonably practicable. The urgency will depend on the circumstances, but should reflect the seriousness of the suspected breach. Where there is an immediate risk to scheme assets, the payment of members’ benefits, or any suggestion of dishonesty, TPR should be contacted by telephone, followed up by a written report via Exchange.
What about the duty of confidentiality?
The duty to whistle-blow overrides other duties, such as confidentiality. The exception to this rule is that legal advisers only have a duty to report breaches when this would not infringe legal professional privilege. Seeking legal advice about a potential breach will not give rise to a duty to whistle-blow by the lawyer, although they may need to advise the client of the duty to do so. The Employment Rights Act 1996 protects employees who make a whistle-blowing disclosure to TPR. TPR will normally protect the reporter’s identity, although this is not guaranteed as the identity may become apparent during the course of its investigation.
The consequences of failing to report
A failure to comply with the requirement to report without a reasonable excuse is a civil offence, and could result in a fine of up to GBP5,000 (individual) or GBP50,000 (corporate). TPR would consider the facts of a particular case on an objective basis to determine if it believes a potential reporter had a reasonable excuse.
DB schemes - notifiable events
Trustees and employers of PPF-eligible schemes are required to provide written notice to TPR of certain ‘notifiable events’. These give TPR early warning of a risk to the security of members’ benefits and a possible call on the PPF: Click here to read more. The government is also planning a consultation later this year on new notification obligations: read more.
DB schemes - moral hazard
‘Moral hazard’ is, broadly, a threat to the security of scheme members’ benefits or an increased risk of reliance on the PPF. It includes events or transactions which cause the employer’s commitment to its pension obligations to be reduced, whether deliberately or as the result of some other activity. TPR has powers to issue notices requiring a monetary contribution to the scheme, or financial support to be put in place. An optional clearance procedure exists for a company to obtain assurance that TPR will not seek to use its powers in relation to a specific transaction or event, which could be:
- employer-related – affecting the employer itself, or its group, and as a result affecting the scheme’s future funding prospects. For example, a change in the level of security given to creditors, or a change in the group structure. Clearance may be relevant where the scheme is less than fully funded (generally tested on the same basis used for the PPF levy, but in extreme cases on a buy-out basis); or
- scheme-related – for example, an agreement to compromise a debt owed to the scheme (which TPR will always want to hear about).
Normally, the employer would open a dialogue with TPR about such an event and applying for clearance. However, for employer-related events, if trustees believe (having assessed the strength of the employer covenant) that the event is detrimental to the scheme, then they should negotiate for additional security or funding to alleviate the detriment (this is referred to as ‘mitigation’). If trustees are not satisfied with what is on offer, and if the company has not sought clearance from TPR in relation to this event, then trustees should consider contacting TPR. TPR expects trustees to be involved in a clearance application, and to comment on whether they support the application and why. Where a proposed transaction might result in an employer abandoning the scheme without fully meeting its obligations to members, TPR expects trustees to apply a particularly high level of scrutiny and to involve it at an early stage. TPR is able to provide guidance where there is uncertainty if an action is an event for which clearance might be appropriate.
DB schemes - employer debt
Where an employer leaves a multi-employer scheme which is in deficit, it may become immediately liable for its share of the deficit. This becomes a debt from the departing employer to the trustees (under section 75A of the Pensions Act 1995). There are various ways in which this debt can be handled, including redistributing it among other employers via a scheme apportionment arrangement, transferring the liabilities under a flexible apportionment arrangement, or entering into a withdrawal arrangement whereby guarantors guarantee any shortfall that is not paid by the departing employer.
Trustees must notify TPR in writing, preferably via Exchange, of any decision to take action which will, or is intended to, result either in a flexible apportionment arrangement taking effect, or the employer entering into a scheme apportionment arrangement retrospectively (that is, if an employer debt has already been triggered).
Where a withdrawal arrangement or approved withdrawal arrangement is in force, then each of the guarantors is required to notify TPR of any notifiable events (as set out above), or of any insolvency event, that occurs in relation to the guarantor.
DC schemes – material payment failures
Trustees of DC schemes have a duty to check that contributions due to the scheme are paid and must report any material payment failures to TPR and members within a reasonable period. A material payment failure is where:
- contribution payments and other amounts under the payment schedule are not paid to the scheme by the due dates; and
- there is reasonable cause to believe that this failure is likely to be of material significance to TPR in the exercise of its functions.
Examples of circumstances that are material to TPR include the sponsor being unwilling to pay; possible dishonesty or misuse of assets; and repetitive failures due to inadequate systems and procedures.
A ‘reasonable cause to believe’ is more than a suspicion. Trustees are encouraged to make enquiries of the employer and use their judgement to determine if a report to TPR is appropriate. Trustees would be expected to ask about the circumstances of the payment failure, action taken by the sponsor as a result, and any wider implications.
Trustees are expected to report a material payment failure to TPR in writing within ten working days, and then to members within 30 days of making the report to TPR. However, where trustees are concerned about a current or imminent danger to members’ and/or employer’s payments unless immediate action is taken, they should report the failure to TPR as soon as they become aware that this could be the case.
Trustees should have risk-based processes in place to check and reconcile scheme contributions that are appropriate to the size and complexity of their scheme. Employers are expected to provide trustees with payment information so as to enable trustees to monitor the payments. Where payment information is not provided to trustees within 14 days of a request, the trustees should report this to TPR.