The Pensions Regulator (the Regulator) provided new and welcome guidance on both 9 and 17 April for employers, trustees and providers in relation to the challenging current circumstances, and in particular the pensions aspects of the Coronavirus Job Retention Scheme (CJRS). On 29 April, new guidance was also published on communicating to members.
This Insight focuses on the Regulator's new approach to the reporting duties and enforcement activity and member communication.
Trustees and providers will welcome the Regulator's new relaxations on reporting duties for certain breaches and the Regulator's proportionate and risk based approach when considering enforcement action.
The latest guidance on communications is aimed at trustees, but will be relevant to administrators and managers too. Clear communication is at the heart of the message, and additional safeguards will also be required for transfers out of defined benefit (DB) arrangements.
Key action points for trustees/employers
1. The regulator is adopting a more flexible approach to reporting obligations
In some circumstances, trustees will not have to report breaches. The relaxations last until 30 June 2020, but the Regulator will review how the relaxations are working and whether an extension is required.
2. The regulator is adopting a more flexible approach to enforcement action
The Regulator can operate a more flexible approach to what enforcement action is appropriate under the current circumstances.
3. Not all reporting obligations are changed
While the flexibilities and new approach are helpful, not all areas benefit from the more relaxed approach, so care is required.
Communicating with members
The Regulator expects schemes to keep members informed about the steps being taken to continue to run the scheme in these challenging times and explain any changes or disruption to normal services.
Transfers
Given the increased risks and financial uncertainties regarding transfers, the Regulator is requiring additional warnings to be given. This includes a letter in a specified form to all members requesting a CETV quotation from defined benefit schemes.
Reporting duties and enforcement
Pension schemes have a number of reporting duties, in particular if trustees are in breach of their legal obligations. However, on account of the current COVID-19 situation, the Regulator says it will be adopting a more flexible approach to reporting breaches and also on enforcement action. This more relaxed approach will apply until 30 June 2020 (at which point it will be reviewed), with the stated aim of taking a reasonable, pragmatic and proportionate approach to their regulatory work in light of the current circumstances.
Helpfully, the Pensions Ombudsman has also confirmed it will take the Regulator's guidance into account in complaints about delays caused by COVID-19 circumstances. The Regulator will also keep the position under review and consider whether more specific flexibilities or restrictions are required and whether the end date of 30 June 2020 will need to be extended.
Trustees should remember, however, that while the Regulator may be taking a more lenient approach to enforcement, their underlying legal duties will remain the same and so they should not look to rely on these easements unless it is really necessary.
The Regulator's new approach in more detail
The Regulator's general approach to administrative and governance requirements will be based on the guiding principles that:
- breaches which can be rectified within a short timeframe (not more than three months) and which do not have a negative impact on savers, do not need to be reported (but records of decisions made and actions taken should still be made though); and
- when deciding whether to take regulatory action in respect of breaches of these requirements, the Regulator will do so on a case-by-case basis and adopt a flexible approach, for example, by granting longer periods to comply and taking COVID-19 into account.
But this approach will not apply to all areas of regulation. The Regulator has set out some areas where it is unable to apply these guiding principles or where the Regulator felt more details on its approach would be helpful. We have focused on the following areas (some of which are more useful/extensive than others).
Areas to which the new approach will apply include:
- Annual Benefit Statements - even if there is a failure to comply within the legal timeframe, provided the breach can be rectified within a short timeframe (not more than three months) and there is no negative impact on savers, the failure doesn't need to be reported. The Regulator states that enforcement action will, though, be considered where the failure to send the statements is not clearly attributable to COVID-19 circumstances. Consequently, trustees will need to be clear about the reasons and document as appropriate the reasons why any failure to comply with the administrative and governance failures has occurred.
- Charge Controls - any breach of the charge cap should be reported unless it is on account of COVID-19 and is not a material breach. The Regulator will take a proportionate response to enforcement where trustees do all that is reasonable to bring charges back within the cap as soon as possible.
- Investment Governance - the Regulator does not anticipate taking regulatory action if a review of investments, principles or any statement in relation to any default arrangement is not delayed beyond 30 June 2020.
- Late accounts - failing to produce audited accounts need only be reported if there is a material significance.
- Recovery Plan - the Regulator does not expect a failure to agree a Recovery Plan to be reported if the delay doesn't exceed three months and won't take enforcement action on that basis.
- Late payment of contributions - failure to pay employer contributions should only be reported where the breach is likely to be of material significance. Normally the Regulator considers any delay beyond 90 days to be material, but is extending that to 150 days on account of COVID-19. Instead of reporting late payment at 90 days, the time has been extended to 150 days. The timescales set out in Codes of Practice 5 and 6 have been extended to provide time to enable providers and employers to bring payments up to date.
Areas to which the new approach does not apply include:
- Chair's Statements - the Regulator has no discretion in relation to Chair's Statements as legislation stipulates what happens if a statement is not submitted on time or not in the correct format, meaning fines must continue to be enforced by the Regulator for non-compliance with these legally stipulated deadlines. That said, the Regulator has stated it will not issue penalty notices before 30 June 2020 and will not review statements received before that date.
- Employer related investments - breaches of the rules on what an employer may invest in could impact benefits and there are criminal sanctions, so the Regulator is not proposing any relaxation of reporting changes.
- Notifiable events - the relaxation does not apply (as these are likely to be potential indicators or serious issues affecting savers).
- Master Trusts - master trust notifications for all triggering and significant events continue to apply. However, where legislation requires notifications, an informal reporting to the relevant supervisor in the first instance may be appropriate.
The relaxations are limited
Some of the relaxations introduced by the Regulator are helpful and the overall approach outlined by the Regulator is also welcome. However, the easements do not remove the existing obligations in some important areas and so, as always, care is required.
Trustees (and employers) should still aim to carry on with business as usual and only look to rely on these easements in extreme circumstances.
DB Transfers
The Regulator has already advised Trustees to consider the heightened risk of members being targeted by scammers and noted that volatility in financial markets and deterioration in funding levels may mean Trustees want to review the terms they are offering for cash equivalent transfer values (CETVs) or even suspend CETV quotations and payments for up to three months (see the Regulator's COVID-19 guidance for trustees (27 March 2020)).
While the Regulator cannot waive the requirement for trustees to report breaches of relevant disclosure obligations associated with the CETV process, the Regulator has now said that it won't take regulatory action against trustees for three months and that, helpfully, the Pensions Ombudsman will also take the Regulator's guidance and COVID-19 circumstances into account when determining whether trustees took reasonable action. This may be of assistance to trustees faced with genuine and unavoidable delays due to the COVID-19 situation. However, careful consideration will be needed about how to communicate any changes in normal timescales to members and how to deal with requests for quotes and payments already in train at the end of March.
Additionally, the new guidance issued by the Regulator on 29 April on communicating with members during these times requires an additional document (prepared jointly by the Regulator, the FCA and the Pensions Advisory Service) to be provided to members whenever a transfer value statement is issued in relation to DB benefits.
Trustees should also actively monitor the number of requests for CETV quotes received and the advisers involved and contact the FCA if unusual or concerning patterns are identified (such as spikes in requests or the same adviser across a number of requests).
Communication
The guidance issued on 29 April has, as its core message, that in these worrying times members need to be fully informed of how trustees are continuing to run their schemes, with any delays in services or timescales being explained. Particular care is required in relation to requests to transfers out or access benefits, given these are irreversible actions with lasting impacts on retirement benefits. However, in addition to the new template letter required to be sent, the guidance includes helpful reminders around appropriate risk warnings and scamming, member options and sources of help and information more generally.
Please contact us if you need further information.