The Pensions Regulator (the “Regulator”) has issued a consultation paper on changes to its codes of practice on reporting late payment of contributions to defined contribution (“DC”) pension schemes and new accompanying guidance.
Rather than focusing solely on reporting late payment of contributions, the revised codes of practice focus on maintaining contributions and include new sections dealing with the monitoring of contributions and the information to be provided to members.
Trustees and managers of DC pension schemes are under a statutory duty to report to the Regulator any failure on the part of the employer to pay contributions (whether employer or employee) which is likely to be of material significance to the Regulator.
The Regulator is required by law to issue a code of practice on this duty and therefore issued its current Code of Practice 5 (which deals with payment failures in occupational pension schemes) and Code of Practice 6 (which deals with payment failures in personal pension schemes).
In light of the introduction of automatic enrolment and the closure of an increasing number of defined benefit pension schemes, membership of DC schemes is expected to increase significantly, and the Regulator has therefore reviewed Codes of Practice 5 and 6, as well as producing new accompanying guidance. The changes proposed to each code of practice, and the content of the accompanying sets of guidance, are largely the same.
The main changes and additions proposed by the consultation paper are summarised below.
- The revised codes of practice include a new section on monitoring contributions and recovering unpaid contributions. Whilst managers of personal pension schemes are under an explicit duty to monitor payments of contributions, no such express duty applies to trustees of occupational pension schemes. However, the Regulator feels that trustees cannot properly comply with their duty to report payment failures unless they effectively monitor contributions and actively pursue and resolve payment failures promptly. Trustees and managers must ensure that they obtain sufficient information on contributions from the employer to enable them to reconcile the contributions which fall to be paid under the payment schedule/direct payment arrangements with the amounts actually paid to the scheme. If the employer does not provide this information, trustees and managers should request it from the employer.
- The accompanying guidance recommends that where there is a payment failure, at least three attempts to contact the employer to recover the outstanding contributions should be made within 90 days of the due date for payment. At least one contact should be by telephone as the Regulator’s research indicates that this is the most effective method of recovery, and a record should be kept of contact attempts. An explanation of the cause and circumstances of the payment failure should also be sought and recorded as this will help the trustees or manager assess whether the failure should be reported to the Regulator.
- The revised codes of practice include a new section on providing information on contributions to members. The Regulator believes that members can play an important role in ensuring timely payment of contributions by their employers. However, this level of member engagement can only be achieved if members know what contributions should be paid and what contributions are in fact paid. Trustees and managers should therefore ensure that members are given certain contribution-related information in a transparent and accessible form so that members can reconcile the two.
- The Regulator has revised its guidance in the codes of practice on when a payment failure will be of material significance to the Regulator. The current codes state that the payment failure is likely to be of material significance where contributions remain unpaid for more than 90 days. The revised codes of practice, however, state that where there is reasonable cause to believe that the employer is unwilling to pay the outstanding contributions, or contributions remain unpaid for more than 120 days, this will be of material significance.
- Payment failures which are reported to the Regulator should also be reported to the members. The revised codes of practice state that this should be done at the latest at the same time that the report is made to the Regulator. The current codes of practice simply state that the report to members should be made as soon as reasonably practicable, and in any event within 30 days.
- The Regulator also proposes to standardise the information to be included when reporting a payment failure to the Regulator. The accompanying guidance sets out the information to be included.
- Separate guidance to help employers (in particular those new to pension provision as a result of automatic enrolment) understand their responsibilities in maintaining contributions will be published alongside the revised codes of practice (this guidance is not included in the consultation paper).
The consultation period runs until 6 December 2012.
Expanding the scope of the codes of practice to cover monitoring contributions as well as reporting payment failures is a logical move on the Regulator’s part, and ties in neatly with its recent focus on the governance of DC schemes.
The monitoring and reconciliation of contributions is of course essential to the effective running of a DC scheme. Whilst the revised codes of practice focus on the need to reconcile actual payments to the scheme with what is meant to be paid to the scheme, they do not cover the need to reconcile where those payments are actually invested with where they are meant to be invested. Trustees and managers should ensure that this equally necessary step is also carried out.
The extension of the long-stop date when a payment failure is likely to become of material significance to the Regulator from 90 days to 120 days is interesting. Trustees and managers would do well to also bear in mind the influence of the Pensions Ombudsman. Recent Ombudsman cases demonstrate that mere compliance with statutory or regulatory timeframes will not provide a defence to a maladministration claim if a payment should and could have been made (or invested after receipt) more quickly. Trustees and managers should therefore continue to ensure that payments are collected and invested as soon as practicable.
While transparency to members is important in building trust and confidence in a DC scheme – and hopefully encouraging member engagement – it is not clear what members will do with the contribution-related information that the Regulator expects them to be given in future. In practice, we would normally expect trustees and managers to be more effective in ensuring contributions are paid in a timely manner. In our view, the cost-benefit analysis on this element is not obvious.