UK Pensions - Pensions Act 2004

Transcription

1 UK Pensions - Pensions Act 2004 Notification to The Pensions Regulator The Pensions Act 2004 sets out matters that trustees, employers (and in some circumstances advisers) must notify to the Pensions Regulator. Broadly, these break down into two groups: significant breaches of law; specific events affecting the scheme or the employer. Additionally: employers may wish to notify other events to the Regulator in order to seek clearance in relation to a transaction; trustees may wish to notify the Regulator of other events which make them concerned about the covenant of the employer. Reporting significant breaches of the law: Whistleblowing The Act has extended the classes of persons who must report breaches of the law to the Regulator. The Act is accompanied by a Code of Practice issued by the Regulator which sets out when the Regulator considers that reports should be made. Who is required to report? Trustees, employers, professional advisers and anyone involved in the administration of the scheme are now statutory whistle-blowers. In the case of individual trustees, the duty falls on each individual. In the case of firms and companies (including a corporate trustee), the duty falls on the firm or company itself. The Code of Practice states that insurance companies, third party administrators, investment consultants and even in-house administrative staff are involved in the administration of the scheme and therefore under a statutory duty to whistle-blow. 1

2 What matters need to be reported? A report to the Regulator is required, if the following conditions are satisfied: there is reasonable cause to believe that there has been a breach of the law; and the breach is likely to be of material significance to the Regulator. Breach of the law A breach of the law may be a breach of a requirement of the Pensions Acts or another Act or regulations, or of a general rule of law. The Code of Practice notes that trust law imposes a duty on trustees to act in good faith and within the terms of their trust deed and rules. If they fail to do so they will be in breach of trust, which the Regulator considers is reportable. As a rule of thumb the Code states that if a trustee acts in a way which would appear unfair or wrong to a reasonable and objective person, a breach of trust may have occurred and a report should be made. However, this is probably going too far, as trustees may be acting lawfully and properly even if a reasonable person might think their conduct unfair (e.g. by correcting an overpayment of benefits). The breach must be relevant to the administration of the scheme, but the Code of Practice defines administration very widely. In effect, all you need is some link between the breach and an occupational pension scheme. It should be noted that even confidential information should be reported, if this suggests a breach of the law. The duty to report overrides all other duties of confidentiality. The only exception (in most cases) is the duty of confidentiality between lawyer and client in communications when giving legal advice. Material significance When deciding whether a breach is of material significance to the Regulator, the following should be considered: the cause of the breach a breach shall be reported if it involves dishonesty or deliberate law-breaking, or poor administration generally, but may not need to be reported if it was an isolated incident; the effect of the breach a breach is more likely to be of material significance if it has an adverse effect on either the funding of the scheme or the information available to members; the reaction to the breach a breach will not normally be of material significance if the trustees take prompt and effective action to investigate and correct the breach; and the wider implications of the breach a breach may need reporting if it shows a lack of trustee knowledge and understanding, or poor systems. In order to discourage duplicate reporting, the Code of Practice makes clear that if a breach has already been reported by one person, it is no longer of material significance to the Regulator May 2005

3 What information should the report contain? The report should contain basic information about the scheme (e.g. name, employer, whether defined benefit or defined contribution); a description of the breach; and the reason why the breach is thought to be of material significance to the Regulator. When should the report be made? A written report of the breach must be made to the Regulator as soon as reasonably practicable, and more serious breaches (e.g. those involving dishonesty) should be reported more urgently. In the case of trustees, this means that they should not necessarily wait until the next trustee meeting to decide whether or not to report. However, it is acceptable for whistle-blowers to take a reasonable amount of time to ensure that the content of the report is accurate and helpful. What happens if a report is not made? If a statutory whistle-blower fails, without reasonable excuse, to make a report where one is required, the Regulator has power to impose a fine on that person. In deciding whether a person has a reasonable excuse, the Regulator will consider such matters as the seriousness of the breach and the reasons for the delay in reporting. The Code of Practice states that companies should ensure that their staff are adequately trained with adequate systems in place. The Regulator will consider the training which an individual has had, when deciding whether they have a reasonable excuse for failing to report. Notifiable events What are notifiable events? Notifiable events are divided into two categories those which trustees are required to notify to the Regulator and those which employers are required to notify to the Regulator. These events are further divided into: serious events - these are always notifiable. For example, a decision by the trustees to compromise a debt owed to the scheme which amounts to 0.5% or more of the scheme s assets, or a change in the employer s credit rating from investment grade to sub-investment grade. non-serious events - these are events which are only notifiable where the scheme was underfunded at the last valuation on the relevant basis (presently the MFR basis, but changing to the PPF buy-out basis following the first valuation effective on or after 22 September 2005), or Pensions Act

4 where there has been a report of a materially significant failure by the employer to pay contributions to the scheme. An example of a non-serious event is two changes in the holder of a key post such as the actuary or auditor, or key employer post within the past 12 months such as the chief executive and any director or partner responsible in whole or in part with some responsibility for the financial management of the employer. A table setting out the full list of currently notifiable events is in the Appendix. Regulations are expected making further events notifiable and to tie in with clearance events. Who is required to make a notification? Only the trustees and employers of occupational pension schemes are required to make a notification. The requirement is individual as well as collective, and each trustee and company director can be penalised for failure to notify. As the purpose of the notification requirement is to protect the Pension Protection Fund, only schemes which are eligible for PPF compensation (i.e. defined benefit schemes and the defined benefit element of hybrid schemes) are affected by the notification requirements. Notification arrangements Notifications should be in writing to the Regulator as soon as reasonably practicable. A standard form for making notifications will be available on the Regulator s website. The Code of Practice says that what is reasonably practicable depends on the circumstances, but in all cases it implies urgency. Trustees should not wait for the next trustee meeting to deal with the notification and employers should make sure that anyone who may be involved in corporate transactions is aware of the notification requirements. Procedures should be in place so that trustees and employers are quickly alerted to any notifiable event. The Regulator may impose sanctions (such as fines) on any trustee or employer who fails to comply with the notification requirements. Additionally, in deciding whether to approve a contribution notice or make a financial support direction the Regulator is entitled to take into account the fact that a person has not reported a notifiable event May 2005

5 Clearance Background: Moral hazard and financial support The Regulator can order persons, other than participating employers, to contribute to a deficit in a pension scheme by issuing either: a contribution notice where action has been taken to avoid a section 75 (debt on employer) debt (under the so-called moral hazard provisions); or a financial support direction where an employer is either a service company or is insufficiently resourced. A contribution notice can be issued against the employer, or a person connected to or associated with the employer, who has been a party to an act (or failure to act) which was intended to prevent a section 75 debt on the employer falling due or being paid. A financial support direction can be issued where the employer is either a service company or is insufficiently resourced, meaning it cannot meet at least half of the pension scheme deficit on the buy-out basis. In the latter case, a direction can only be made if an associated person could meet this amount. A direction can be made against the employer, or a person connected or associated with the employer, if the Regulator thinks it is reasonable to require that person to contribute to any deficit in the pension scheme. Persons connected to or associated with the employer include group companies and directors (but not individual employees). The Regulator will be able to look back to any person associated with the employer during the nine months leading up to the financial support direction. The financial support provisions differ from the moral hazard provisions in that there is no requirement for a person to act in bad faith before a financial support direction is made. Once the Regulator has issued a direction, those served with the direction must put forward proposals for financial support for the whole or part of the employer s pension liabilities. The arrangements must be approved by the Regulator. Clearance statements Companies can apply to the Regulator for clearance before undertaking certain activities. A clearance statement says that the Regulator will not issue a contribution notice or a financial support direction as a consequence of the activity unless there is a material change in circumstances. Each person seeking to rely on a clearance statement must make an individual application. Pensions Act

6 When should a company apply for a clearance statement? The Regulator has issued guidance stating that it wishes to know about any event which is financially detrimental to the ability of a defined benefit scheme to meet its pension liabilities. An event includes a transaction, an act or failure to act, and in some cases a set of circumstances which affects a company. Although not all events which fall under the above definition will be notifiable events, the implication appears to be that any company which fails to notify the Regulator of such an event risks having a financial support direction imposed on it. Is the scheme underfunded? Guidance from the Regulator indicates that it will only impose a financial support direction where there is an ongoing employer if a scheme is underfunded. The basis for determining whether a scheme is underfunded is: where there is doubt that the employer will continue as a going concern, the buy-out basis; where there is no doubt that the employer will continue as a going concern, the higher of: the FRS17 basis; and the funding basis that the trustees have set for the scheme. If the scheme is fully funded on the appropriate basis, there is no need to apply for a clearance statement. Is the event one which the Regulator wishes to know about? The Regulator has said that it is only appropriate to seek clearance for events which do (not might) affect the pension scheme as creditor of the company, and which affect the ability of the scheme to meet its pension liabilities. Such events will usually fall within one of the following categories (referred to in the Regulator s guidance as Type A Events ). Change in priority order Any event which changes the level of security given to creditors, with the result that there may be fewer assets available on a winding up for the pension scheme as an unsecured creditor of the company. Examples are the granting of fixed or floating charges, and the guidance indicates that the Regulator will consider it to be material where the charge affects 25% or more of the employer s or the group s assets. Return of capital Any reduction in the assets of a company, with the result that there are not enough assets available to fund the pension scheme deficit May 2005

7 Examples are dividend payments, share buy backs and distributions in specie, and the Regulator will consider it material where the cumulative annual return of capital is large or unusual (i.e. more than twice the average of the last three years return, or reducing dividend cover to less than 1.25 times). The Regulator will be particularly concerned where the capital is returned to an entity outside the European Union or to an entity who would not be subject to a financial support direction. Change in control Where there is a change in the control of a company which reduces the overall employer covenant. An application for clearance should be considered where there is a full or partial change in the control structure which is material (e.g. it has negatively affected the employer s credit rating). Arm s length commercial transactions will not normally require clearance, nor will raising funds by ways such as flotation and private placement or the issue of unsecured debt unless they involve one of the above scenarios. Trustee notices The Regulator has indicated that where an event occurs which is not a notifiable event, trustees are welcome to tell the Regulator about it if they have concerns that the transaction will affect the employer s covenant, and the Regulator will investigate and may act on such report. Pensions Act

8 Appendix: Notification and reporting Reporter Type of scheme Events to be notified or reported to the Pensions Regulator Trustees Trustees Employer All eligible schemes (i.e. eligible for PPF compensation) Eligible schemes underfunded at the last valuation, or where there has been non-payment of employer contributions All eligible schemes A decision by the trustees to compromise a debt owed to the scheme of 0.5% or more of the scheme s assets A decision by the trustees to grant benefits on more favourable terms than provided for under the Rules, without either seeking actuarial advice or securing additional funding where this was advised by the actuary A decision by the trustees to compromise a debt owed to the scheme of less than 0.5% of the scheme s assets Two or more changes to the auditor or actuary within the past 12 months A decision by the trustees of another scheme to transfer at least 1.5 million (or 5% of the scheme s assets, if lower) to the scheme A decision by the trustees to grant benefits to a member, the cost of which is at least 1.5 million (or 5% of the scheme s assets, if lower) Any decision by the employer to seek to compromise a debt payable to the scheme A decision by the employer to cease to carry on business in the UK Receipt of advice that the employer is wrongfully trading Where there is no reasonable prospect that the employer will avoid going into insolvent liquidation The conviction (in any country) of a director or partner of the employer for an offence involving dishonesty A change in the employer s credit rating from investment grade to subinvestment grade Is reporting compulsory? Yes Yes Yes Form to be used Notifiable events reporting form (to be made available on Notifiable events reporting form (to be made available on Notifiable events reporting form (to be made available on 8 11 May 2005

9 Reporter Type of scheme Events to be notified or reported to the Pensions Regulator Employer Trustees, employers and advisers Any affected person Eligible schemes underfunded at the last valuation, or where there has been non-payment of employer contributions All schemes Underfunded defined benefit schemes Any breach by the employer of a banking covenant (except where the bank agrees not to enforce the covenant) A decision by a controlling company to relinquish control of the employer Two or more changes to the chief executive or any director or partner responsible for finance within the past 12 months A change in the employer s credit rating (other than from investment grade to sub-investment grade) There has been a breach of the law which is of material significance to the Regulator. The following factors are relevant to the question whether the breach is of material significance: Cause of the breach (e.g. dishonesty, poor administration systems) Effects of the breach (e.g. adverse affect on funding or on information available to members) Reaction to the breach (e.g. whether trustees failed to take prompt action to remedy the breach) Wider implications (e.g. demonstrates lack of trustee knowledge and understanding of pensions law) An application for clearance may (but need not) be made in respect of any event which will (not might) affect the pension scheme as creditor of the company. The three principal categories are: Change in priority order (e.g. a fixed or floating charge is issued over 25% or more of the company s assets) Return of capital (e.g. large or unusual dividend payments, share buy backs or distributions in specie) Change in control which reduces the overall employer covenant Is reporting compulsory? Yes Yes No Form to be used Notifiable events reporting form (to be made available on Reporting breaches form (to be made available on Clearance application form (available on 9 Pensions Act 2004

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