This guidance is designed to complement Code of practice 01: Reporting breaches of the law and should be read in conjunction with the code.
Introduction
This guidance is designed to complement the code of practice on Reporting breaches of the law and should be read in conjunction with the code.
Its main purpose is to give examples of hypothetical breach situations relating to defined benefit and defined contribution occupational schemes and to act as a yardstick to help those who might have to make a report. In addition it provides further explanation about some of the matters covered by the code and it includes examples of processes and procedures.
Each section of the guidance is referenced and linked to the appropriate code paragraph.
Late payment of scheme contributions
Please note that the code does not address breaches relating to the late payment of contributions to either occupational schemes (defined benefit or defined contribution) or personal pension schemes (including stakeholder). Late payment of contributions in relation to money purchase schemes is the subject of:
- reporting late payment of contributions to occupational money purchase schemes (Code of practice 05); and
- reporting late payment of contributions to personal pension schemes (Code of practice 06), the revised versions of which came into force in September 2013.
Late payment of contributions to defined benefit schemes is covered in paragraphs 161 to 167 of Code of practice 03: Funding defined benefits, which came into force in February 2006.
Guidance for specific paragraphs of the code
Code paragraph 12
(about employers who have the duty to report)
The duty to report which falls on employers extends to insolvency practitioners who continue to employ scheme members. For example, an insolvency practitioner may become aware that the employer had failed to pass over contributions due to the scheme for a significant period prior to the insolvency event. In addition, if the trustees were all senior employees of the employer and had not reported the contribution payment failure to the Pensions Regulator, a report by the insolvency practitioner must be considered.
Code paragraph 13
(about professional advisers who have the duty to report)
The term 'professional adviser' does not extend to an adviser who is engaged just to provide advice or services to an employer with an occupational pension scheme. However, if such an adviser alerts the employer to a relevant breach, the employer has a duty to consider reporting it.
Where a firm of advisers is engaged to provide advice or services to the employer and, under a separate engagement, to the scheme as well, as long as the staff involved in those two engagements are quite separate, a similar principle applies. That is to say, in their capacity as adviser to the employer, the adviser firm has no duty to consider reporting to the Pensions Regulator. In the same way as above, if the adviser alerts the employer to a relevant breach, the employer has a duty to consider reporting it.
Code paragraph 24
(on the duty to report)
The duty to report from 6 April 2005 (the date the changes to the reporting requirements took effect) applies to breaches which occurred before that date. A breach that was reported to the Occupational Pensions Regulatory Authority (Opra) is treated as having been reported to the Pensions Regulator. Other breaches which occurred before 6 April 2005 should be reported if they satisfy the criteria in the code.
Code paragraph 28
(on breaches of trust law)
Examples of actions by trustees which might constitute a breach of trust law are:
- in the exercise of a trustee discretion, not considering all classes of member or treating some members of the same membership class more favourably than others;
- failing to ensure that adequate records are maintained and procedures put in place for the proper running of the scheme;
- delegating duties when not authorised to do so;
- taking a decision without properly addressing a conflict of interest which exists in relation to it; and
- acting contrary to professional advice without having a sound reason for doing so.
Code paragraph 31
(on having reasonable cause to believe that a breach has occurred)
Consider the following situation:
A member contacts the scheme administrator with a suspicion of wrong-doing after reading the latest trustee report and accounts. The administrator is thus obliged to consider whether this ought to be reported.
The member has noted that the scheme assets have fallen by some 1 million over the last year and points out that this is the cost of new machinery just installed by the employer. The member alleges that the employer must have been wrongly using pension scheme money for this purpose.
The scheme administrator checks the accounts and it is clear that the real reason for the apparent loss in value of scheme assets is the behaviour of the Stock Market over the period. The administrator is able to reassure the member that nothing untoward has happened with regard to scheme assets.
The administrator concludes that there is not a reasonable cause to believe that a breach has occurred.
Code paragraph 32
(on checking the facts around a suspected breach)
An example around checking facts:
During the course of preparing the supporting papers in advance of the statutory audit, the scheme administrator discovers that for some months funds appear to have been transferred overseas in a process not usually used by the scheme. The individual amounts are not large, but over time they constitute a significant sum. The destination for those payments is a Caribbean island often used as a tax haven and the administrator feels that further investigation is required.
The administrator checks with the trustees:
- whether they have authorised any payments overseas;
- if a copy of the mandate is available; and
- what reasons lie behind the unusual procedure adopted.
In this case the trustees had decided to alter the method by which pensioners living on this particular island were paid because high bank charges were falling on the members concerned and eroding their already small pensions. The trustees had neglected to notify the administrator and had dealt with the bank directly following communication from a former member-nominated trustee who had retired to the island concerned.
Code paragraph 33
(on clarifying the law around a suspected breach)
Reporters should clarify their understanding of the law to the extent necessary to form a view as to whether there has actually been a breach.
Advisers and service providers are expected to be familiar with the detail of legislation around their specific functions. For example, scheme administrators should know the disclosure requirements, scheme auditors should know the law around auditing scheme accounts and scheme actuaries should know the law relating to scheme funding.
Where a breach relates to an aspect of the law not normally the province of the reporter concerned, it would be reasonable to first approach the relevant scheme adviser or service provider for confirmation if the question at issue seems straightforward.
If, after initial investigation, the question is clearly more complex (on whether an investment is employer-related, for example), reporters are expected to take their own legal advice. However, reporters are not expected to incur significant legal costs and if an initial legal opinion indicates that a breach might have occurred, the reporter is expected to move to the next stage and make the decision on material significance, assuming reasonable cause to believe the breach has occurred has been established.
For example, consider a small insured scheme where the employer is sole trustee. The employer/trustee reads that the trustees of most schemes must obtain audited accounts for the scheme or an auditor's statement every year. They have never obtained audited accounts nor an auditor's statement for their scheme. We would expect them to ask their IFA (who may in turn ask the insurer) or the insurer itself to clarify the legal requirement. The insurer clarifies that as the scheme is classed as a 'relevant earmarked scheme' the trustees do not have to obtain audited accounts nor an auditor's statement.
Code paragraphs 35 to 45
(the traffic light framework)
We put forward a traffic light framework to help reporters decide whether a breach is likely to be of material significance. The examples of red, green and amber breach situations in this guidance provide benchmarks against which reporters can judge breaches they come across.
- Red breach situations are always of material significance to the Pensions Regulator and should be reported.
- Green breach situations are not of material significance and do not have to be reported (but should be recorded).
- Amber breach situations are less clear cut; a reporter must take into account the context of the breach in order to decide whether it is of material significance and should be reported.
The examples in this guidance are not an exhaustive list. They are designed to illustrate situations with which any actual breach can be compared and thereby aid the reporter in reaching the appropriate decision in conformity with the legislation and the code. They should not be taken to be a substitute for the exercise of judgement by the reporter based on the principles set out in the code itself.
Red breach situations
A breach is in the red category because one or more of the following applies:
- it was caused by dishonesty, poor scheme governance, poor advice or by a deliberate contravention of the law;
- its effect is significant;
- inadequate steps are being taken to put matters right; or
- it has wider implications.
Green breach situations
A breach is in the green category because all of the following apply:
- it was not caused by dishonesty, poor scheme governance, poor advice or by a deliberate contravention of the law;
- its effect is not significant;
- proper steps are being taken to put matters right; and
- it does not have wider implications.
Amber breach situations
A breach in this category does not fall obviously into the red or green classification. The decision whether or not to report will require a balanced judgement based on the breach's cause, its effect, the reaction of trustees and others to it and any wider implications it may have. In this context, other previous reported or unreported breaches will be relevant in deciding whether a contributory cause of the breach is lack of adequate oversight or controls on the part of the trustees.
View amber breach situations (PDF, 274kb, 5 pages)
Examples of red breach situations [with reasons]
- Matters indicating possible dishonesty or misuse of assets or contributions, such as:
- authorisation of loans from the scheme to an associate of the trustees or the employer, however short-term. [Because the cause is likely to be either a deliberate decision by trustees to flout the law or, at best, a failure to appreciate that such a loan is illegal and its effect is a weakening of member security];
- a custodian or fund manager receives an instruction to transfer documents of title or sale proceeds to a destination that does not appear to be another custodian, fund manager or approved pension scheme without a satisfactory explanation. [Because the potential effect is to remove assets from the scheme and the cause may be dishonesty]; or
- a persistent or significant departure from the scheme's statement of investment principles, for example, so as to allow self-investment in the employer or to allow a significant departure from agreed asset class ranges. [Because it may have a significant effect on the security of members' benefits (in a defined-benefit scheme) or on members' expectations (in a money-purchase scheme)].
- Breaches carrying a criminal penalty, such as:
- employer-related investment breaches, particularly making illegal loans [because the effect is to weaken security for members' benefits]; or
- a trustee acting whilst disqualified. [Because the effect is that a person not considered fit and proper is making decisions on the scheme].
- Failure of the trustees of a defined-benefit scheme to review their investment policy in the light of significant changes to the circumstances of their scheme, for example, when a scheme no longer has any active members or the membership profile changes significantly following a bulk transfer of members in or out of the scheme, or the scheme begins winding up. [Because the cause may be a lack of understanding on behalf of trustees of the importance of investment policy and the effect may be a weakening of the security for members' benefits.]
- trustees prepare or revise a statement of investment principles without consulting the employer. [Because the effect is that the employer, who is the ultimate sponsor of the scheme, is being denied the right to make his views on such a vital subject as investment strategy known to the trustees and the cause is likely to be at best trustee ignorance of this important requirement and at worst a deliberate breach.]
- Persistent failure to obtain auditors' statements on contributions or audited accounts by the seven month legal deadline, for example, as a result of poorly maintained records or inadequate administration systems. [The cause may be a failure of the trustees to take responsibility for the administration of the scheme and the wider implications are that further administrative breaches are likely in the future and members may be receiving incorrect benefits.]
- Trustees taking decisions on matters which require professional advice, for example regarding scheme investments or augmentation of pensions, without obtaining it from the appropriate, properly appointed adviser [The cause may be a lack of understanding on the part of trustees of their responsibilities and the effect may be that inappropriate decisions are made.].
- Widespread and/or persistent administrative failures stemming from poor record keeping or inadequate controls, for example:
- widespread and persistent misallocation of member contributions to member accounts in a defined-contribution scheme or additional voluntary contribution arrangement, where the trustees and/or administrator are aware of the misallocation and have taken no action to resolve the matter or have failed to resolve it promptly. [Because the cause may be poor governance and controls, the effect is that many members' benefits are affected and the trustees and administrators are not taking the action needed];
- widespread administrative delays and errors in an occupational scheme, including frequent cases of incorrect benefits being quoted or paid, and late or non receipt of information such as transfer value quotations and benefit statements where the problem has been known for some years but still persists. [Because the cause seems likely to be inadequate governance, in particular, a failure to impose service standards on the administrator and the effect is that members are experiencing delays and are, in some cases, not getting correct benefits and the trustees' reaction is inadequate. In the case of a third party administrator, there may be implications for their other clients];
- Failure by the trustees to make an initial or subsequent report on the progress of the winding-up of the scheme within the legislative timescales or shortly thereafter. [Because the effect is that the trustees are not fulfilling an important regulatory responsibility to keep the Pensions Regulator informed and the cause may be that the trustees lack the appropriate knowledge and understanding to carry out their duties].
- Failure by the employer or the trustees in respect of a scheme covered by the Pension Protection Fund to inform the Pensions Regulator when a notifiable event occurs. [The effect is that an important statutory early warning of a potential funding problem is not given to the Pensions Regulator.]
Examples of green breach situations
- Breaches, not involving dishonesty, in schemes where all the members are trustees or directors of the sponsoring employer and their relatives and therefore largely control actions (or lack of action) in relation to the scheme. [Because the cause is not dishonesty and the effect falls only on those persons who make decisions in relation to the scheme. The Pensions Regulator's concerns are with situations where benefits are under the control of trustees (or a manager) for the benefit of others.]
- Occasional administrative lapses in an otherwise well run scheme, for example which arise due to a systems failure or a change in adviser, and which are corrected in a timely manner when identified. For example:
- an auditor's statement on contributions or audited accounts obtained within a relatively short period after the seven-month legislative deadline;
- failure to invest a month's contributions promptly, in accordance with the scheme's procedures;
- failure to pay a member's benefits correctly or in a timely manner;
- failure to provide a member with timely or correct information, for example, a cash equivalent transfer value quotation or estimate, or an annual benefit statement to a member of a defined-contribution scheme; or
- failure to issue the annual benefit statements on time to members of a defined-contribution scheme following a change of scheme administrator.
In all the above cases, the trustees or manager, in conjunction with their advisers and service providers must be taking appropriate action to put matters right as quickly as possible and prevent recurrence. [The effects of the breaches are not serious nor does their cause seem to be poor governance on the part of the trustees, who are reacting appropriately.]
- Failure to adhere precisely to the detail of the legislation where the breach is unlikely to result in an error or misunderstanding, for example:
- inconsequential and corrected omissions from the records of trustees' meetings;
- a minor defect in a professional adviser's appointment documentation, provided this has been corrected, such as a failure to specifically state the date from which the appointment is effective; or
- minor breaches of investment guidelines, for example, through dealing or implementation errors or movements in the markets, where the breach is remedied within a reasonable period of time and, where relevant, the scheme is compensated.
[The effects of the breaches are not serious nor does their cause seem to be poor governance on the part of the trustees, who are reacting appropriately.]
- Failure to put in place a payment schedule for an earmarked scheme where no contributions are payable throughout the relevant accounting period. [The breach has no effect on members' interests.]
- Breaches arising from the trustees' inaction where that inaction is a temporary and practical response to circumstances outside the control of the trustees or their advisers. For example:
- failing to issue the required information to members about the progress of a wind-up where the trustees will be able to provide more meaningful information to members shortly after the deadline has passed and members have otherwise been kept informed; or
- trustees not issuing statements of entitlement to members when a scheme starts to wind up when the scheme actuary has advised that it would be unsafe to do so until the scheme's funding level can be reliably confirmed. In this case, trustees are expected to be actively working to resolve outstanding issues, including confirming the scheme's assets and liabilities, and are keeping members informed.
[Trustees have good reason for temporarily not taking action and the effect is that more relevant and useful information will be issued in due course]
Examples of amber breach situations are provided in the following table.
The bare breach situation is described together with factors relating to cause, effect, reaction and implications tending to make it reportable or otherwise.
View amber breach situations (PDF, 274kb, 5 pages)
Examples of breaches of the law relating to occupational defined contribution (DC) trust-based pension schemes
We have produced some examples of what to consider when deciding whether to report breaches relating to these types of scheme.
View DC breach situations (PDF, 239kb, 32 pages)
Decision-tree: deciding whether to report
Transcript of Decision tree: deciding whether to report (PDF)
Code paragraph 37
(on considering other breaches)
The fact that a breach is judged to be green should not be interpreted as meaning that no action is needed to put matters right or to prevent recurrence. In addition, such breaches should be recorded as they may be relevant to the decision whether to report future breaches.
Code paragraph 41
(on action to correct a breach)
The Pensions Regulator does not expect a reporter to wait until a problem has been fully corrected before reaching a decision on whether to report. The reporter may accept assurances given by the person concerned that corrective action is being taken. However, the reporter should monitor the situation and if the action is not taken, the timetable for taking it slips or the action taken proves to be ineffective, the reporter should consider whether to report to the Pensions Regulator.
Code paragraph 53
(on reporting procedures)
The procedure illustrated below is suitable for a firm such as an actuarial consultancy, an auditing firm, or a third party administrator employing staff with a variety of pension scheme experience. The Pensions Regulator recognises that small firms may not have sufficient staff to enable them to implement this procedure in full. In particular, they may not have enough appropriately experienced staff to form a standing 'Regulator Committee' to review and discuss amber breach situations.
In following the code, a firm or individual should adopt a procedure reflecting their particular circumstances. Small firms or sole practitioners may consider it appropriate to arrange links with other similar firms for the purpose of talking through, on a no-names basis, amber breach situations. Reporters must bear in mind, however, that these discussions have the aim of clarifying the potential reporter's thought process. The reporter remains responsible for the final decision as to whether a report is needed.
The following is an example procedure for evaluating matters to determine whether a breach has occurred and, if it has, whether it is likely to be of material significance to the Pensions Regulator.
Transcript of the paragraph 53 flowchart (PDF)
Code paragraph 60
(on maintaining a dialogue with advisers)
Trustees and managers should remember that their advisers are under a statutory duty to report. Failure to report where appropriate may leave advisers open to both financial and professional sanctions. If an issue arises, trustees and managers should consult their advisers as soon as possible as to the best method to rectify the situation and should be alive to the fact that an adviser is not being disloyal if it is necessary to report a breach; merely acting in accordance with the law and the adviser's professional duties.
Code paragraph 67
(to follow up on a report)
The Pensions Regulator will usually notify the reporter when action on a particular report has been concluded.