Welcome to our twenty fifth Clarity Guide. The moral hazard powers of the Pensions Regulator (‘tPR’) have received increased attention recently, particularly in light of high profile cases such as BHS. This Clarity Guide therefore considers tPR’s other supervisory and regulatory powers in the context of occupational pension schemes and auto enrolment schemes (but not public sector or statutory schemes, or master trusts). TPR was established by the Pensions Act 2004, with effect from 6 April 2005, but many of its powers (for example, removing and appointing trustees and issuing fines) were first exercisable by the Occupational Pensions Regulatory Authority and consequently are found in the Pensions Act 1995. TPR’s powers in relation to auto enrolment are set out in the Pensions Act 2008.
Information gathering and investigatory powers
Scheme information: tPR receives reports and information about a scheme, either on an ad hoc basis or on a regular and recurring basis.
— Trustees must file scheme returns when requested, providing tPR with data on the scheme’s structure, membership and employers, advisers and administrators, and financial information. Trustees must also submit recovery plans to tPR and inform tPR of the late payment of contributions to the scheme in certain circumstances.
— Trustees and employers must notify tPR of specified notifiable events, including where there is a transfer of assets into or out of the scheme exceeding £1.5 million, where an employer ceases to carry on business in the UK, or where action is taken to prevent a section 75 statutory debt being paid (e.g. entering into various apportionment or withdrawal arrangements).
— Trustees, employers and advisers are required to submit a whistleblowing report if they discover any breach of law which is relevant to the administration of the scheme and which they consider is likely to be of material significance to tPR.
Skilled person’s report: tPR may require trustees or an employer to appoint a skilled person to produce a report on a particular matter in relation to the scheme. TPR exercised this power for the first time in 2016, requiring a skilled person to report on the level of deficit recovery contributions an employer could afford to pay into the relevant scheme.
Documentation and information: tPR may require documents or information by notice to a trustee, employer, adviser or any other person who appears to tPR to hold or be likely to hold relevant information. In addition, and for auto enrolment schemes only, tPR may require the attendance in person of a trustee, employer or adviser to explain any document or information provided to it.
Regulatory and enforcement powers
Civil penalties: tPR can, but is not necessarily required to, issue fines to trustees and employers in a wide range of circumstances, where statutory obligations are breached. The maximum fines are £5,000 for an individual, and £50,000 in any other case.
Where there is a breach of auto enrolment duties and an employer (or other party) fails to comply with a compliance notice issued to it, tPR may issue fixed penalty notices of £400. There is a system of escalating penalty notices for more serious or continuing auto enrolment breaches. The penalty varies according to employer size, up to £10,000 a day for those with 500 or more workers.
There is a mandatory fine of up to £2,000 for failure to provide an annual Chair’s statement (where one is required).
TPR has issued fines in connection with failures to satisfy the auto enrolment and annual Chair’s statement requirements. It is difficult to know to what extent tPR has exercised its discretionary power to issue fines for breaches of statutory obligations because it takes mitigating circumstances into account when deciding whether to issue a fine and the amount of any fine.
Improvement and Compliance Notices: if tPR considers that a trustee or employer is breaching statutory requirements, it may issue an improvement notice directing the trustee or employer to take steps to rectify the breach. Similarly, tPR may issue a third party notice to anyone involved in administering or advising a pension scheme if tPR considers that person is breaching statutory requirements, again directing that person to take action to remedy the breach.
TPR has similar powers in the context of auto enrolment schemes for failure to comply with auto enrolment requirements but the notices are referred to as compliance notices and third party compliance notices.
It may also issue an unpaid contributions notice, directing an employer to pay contributions that are unpaid to the scheme with interest.
Trustees: tPR has wide powers to remove, suspend, prohibit and appoint trustees of occupational pension schemes and it has exercised these powers on many occasions.
Scheme funding: tPR has the power to intervene in the context of scheme funding by:
— imposing a schedule of contributions, where the trustees and employer are unable to reach agreement;
— issuing directions for how a scheme’s technical provisions are to be calculated and the period over which trustees should remedy a failure to meet the statutory funding objective; or
— modifying the future benefit accrual of active members.
TPR has recently confirmed that it is challenging imprudent assumptions and/or inappropriate recovery plans and is committed to making greater use of its scheme funding powers in future.
Freezing orders: where tPR is considering winding up a scheme it can make a freezing order, which has the effect of stopping further benefits accruing in the scheme whilst the order is in place. A freezing order may also contain directions including that no new contributions should be paid to or that certain benefits should not be paid from the scheme.
Winding up a scheme: tPR can order that a scheme be wound up if it considers that the scheme should be replaced by another scheme, is no longer required, or that the wind up is necessary to protect the interests of scheme members.
Most commonly this power has been exercised to facilitate the winding up of schemes where it is otherwise impossible to do so (for example, the scheme’s rules do not include an effective winding up power) or winding up would be unduly complex or protracted in practice.