Pensions Snapshot - March 2018
This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of February 2018 in relation to occupational pension schemes.
This edition of snapshot summarises some of the key legal and regulatory developments that occurred up to the end of February 2018 in relation to occupational pension schemes. The topics covered in this edition are:
- The Pensions Regulator's Statement on Managing Service Providers
- Chair's Statement - TPR fines six schemes for non-compliance
- Pensions Ombudsman determination (PO-16971): Mr E - misquoted spouse's pension only resulted in non-financial injustice
- Dominic Chappell convicted and fined for failing to provide BHS pension scheme information
- Employer debt regulations revised to introduce deferred debt arrangements
The Pensions Regulator's Statement on Managing Service Providers
Last month (February 2018) the Pensions Regulator (TPR) published its Statement Managing Service Providers (the Statement). The Statement summarises TPR's expectations of good practice by trustees and scheme managers on the management of service providers, and planning for events which could have major consequences for their schemes. The Statement will be of interest to the trustees of pension schemes and also to their advisers.
The Statement comments on the responsibilities of trustees in the following areas: managing commercial relationships, risk management and business continuity planning, and resolving issues. As a part of TPR's drive towards improving trustee governance in pension schemes, the Statement emphasises the importance of appropriate systems and controls when selecting and monitoring service providers.
Managing commercial relationships
In the Statement, TPR notes that trustees managers remain "ultimately accountable" for the running of their scheme. The appointment of service providers to carry out specific tasks does not detract from that responsibility.
TPR suggests that trustees can demonstrate management of their commercial relationships with service providers by:
- fully understanding the scope of the roles and responsibilities being delegated to third parties.
- carefully reviewing the quality and suitability of service providers before appointing them.
- being confident that their service providers have the requisite skills, training and experience to deliver services.
- being confident that their service providers are operating in accordance with legal obligations. Here, TPR recommends using service level agreements and implementing regular reporting and monitoring requirements.
- taking steps to address areas of poor performance.
- implementing procedures (with a clearly documented procedures manual) to enable continuous and consistent service where there is a change (or failure) in service provider.
The Statement also recommends that, when reviewing the suitability of providers, trustees should consider "relevant independent frameworks which provide evidence of the suitability of the provider". Examples include ISO certification and independent accreditation frameworks for specialist functions such as administration.
Risk management and business continuity planning
As a part of their responsibility for risk management and business continuity planning, trustees need to ensure arrangements are in place to manage risks that have "significant" consequences for their scheme and members. To do this, TPR expects a business continuity plan to be put in place which sets out actions that need to be taken if events occur which affect the running of the scheme (e.g. the failure of a third party provider). Trustees are also expected to understand their provider's business continuity arrangements "and be confident that they ease any risks to member data and benefits".
Finally, TPR states that trustees should work with their service providers to address any areas of concern. Examples of possible ways to resolve a problem include requesting an improved level of service and using any complaints or mediation processes detailed in relevant contracts.
When considering whether to end a contract with a service provider, TPR says that trustees and scheme managers should think about risk, practical difficulties and costs to members before making a decision to end a contract.
Chair's Statement - TPR fines six schemes for non-compliance
According to a press release by TPR on 15 February 2018, it has issued its first fines for non-compliance with the Chair's statement requirements. The fines were issued to six schemes. TPR took the step of naming the professional trustees of these schemes.
The Chair's statement is a mandatory statement which trustees of defined contribution schemes have to prepare annually. It must be signed off by the Chair within seven months of the end of each scheme year.
TPR is keen to point out that the Chair's statement should not be seen by trustees as a "tick box" exercise. It also appears to be unsympathetic to schemes that do not satisfy the requirement:
"We offer a quick guide for trustees about how to complete a chair's statement to guide them through the process, so there is really no excuse. Schemes that don't meet the requirements will not only get a fine, but will now be named on our website too."
The fines range from circa £500 to a maximum of £2000. Four of the six schemes appear to have had professional trustees in place.
Pensions Ombudsman determination (PO-16971): Mr E - misquoted spouse's pension only resulted in non-financial injustice
Mr E was a pensioner member of the British American Tobacco UK Pension Fund (the Fund). In 2015 he decided to gift his daughter £93,200 to purchase a share in an investment property. Mr E claimed that the decision to provide the gift was taken after considering several financial factors, including a spouse's pension from the Fund on his death of £24,800 per annum. This figure was derived from quotations provided by the Fund administrator.
In 2016 Mr E received a revised quotation for the spouse's pension of £23,726. Mr E complained to the Ombudsman that he would have gifted a smaller amount to his daughter if he had originally been provided with correct figures. As such, Mr E claimed that he had suffered a financial loss due to the incorrect quotations.
The Ombudsman agreed that it was reasonably foreseeable to the Fund administrator that Mr E would base his financial planning on the spouse's pension quotations and that the administrator should have ensured the quotations were correct. However, the Ombudsman noted that the alleged loss claimed by Mr E related to a contingent benefit and so was a hypothetical loss. Mr E did not suffer an actual financial loss due to the incorrect quotations and so no compensation was payable to him as a result of financial injustice.
However, the Ombudsman held that there had been maladministration in relation to the incorrect quotations which had resulted in significant distress and inconvenience to Mr E. As a result, the Fund trustees were ordered to pay Mr E a further £500 for non-financial loss in addition to £500 that had already been paid to him by the Fund administrator.
Dominic Chappell convicted and fined for failing to provide BHS pension scheme information
Dominic Chappell, the director and majority shareholder of the company that bought BHS for £1, has been ordered to pay more than £87,000 for failing to hand over information to TPR.
Section 72 of the Pensions Act 2004 provides TPR with power to issue an occupational pension scheme's trustees or employers with an information notice requiring them to produce any document, or provide any other information, which is relevant to the exercise of TPR's functions. TPR used this power to issue Mr Chappell with an information notice in relation to its investigations into the sale, and then collapse, of BHS.
Mr Chappell failed to provide the information despite numerous requests and was convicted at Barkingside Magistrates’ Court of three charges of neglecting or refusing to provide information and documents without a reasonable excuse. The Judge ordered him to pay a £50,000 fine, £37,000 costs and a £170 victim surcharge.
This is the fifth criminal conviction secured by TPR against individuals or organisations for failing to comply with section 72 information notices and suggests that TPR is adopting a new hard line in relation to information notice breaches. TPR publicly stated last year that it would no longer hesitate to prosecute companies and individuals who refuse to hand over information it needs for an investigation.
Employer debt regulations revised to introduce deferred debt arrangements
Following the completion of a consultation which began in April 2017, the Government has introduced legislation making adjustments to the employer debt regime with effect from 6 April 2018. The main change is the introduction of a new method, a deferred debt arrangement (DDA) to manage a section 75 debt that arises when an employment cessation event (ECE) occurs.
A DDA will enable an employer to defer the requirement to pay an employer debt triggered by an ECE. This is also subject to a range of conditions that would need to be met before a DDA can be put in place and a DDA may terminate in various circumstances, meaning a new debt will probably arise. As a result of the consultation, a number of changes have been made to both the conditions for entering in to a DDA and the circumstances in which a DDA will terminate. In particular, the funding test condition for entering into a DDA has been replaced with a lighter-touch requirement concerning the deferred employer's covenant.
The Government has not watered down the power of the trustees to terminate a DDA in certain circumstances, including where the trustees consider the relevant employer's covenant is likely to weaken materially in the following 12 months. That termination trigger may make DDAs unattractive to employers in most cases. However, DDAs may be of assistance to employers that participate in non-associated multi-employer schemes, who might otherwise struggle to use any of the pre-existing employer debt management options.