So far the Pensions Regulator has issued two statements (October 2008 and February 2009) on how it expects pension scheme employers and trustees to deal with the impact of the current economic crisis. In April the Regulator issued a further statement highlighting the kinds of behaviour that would cause it to intervene.
April 2009 statement
The Regulator reiterates the comment made in both the October 2008 and February 2009 statements that the regulatory framework is flexible enough to cope with the impact of the recession. In particular, its operational processes are designed and equipped to reflect the prevailing financial conditions. At the same time the Regulator continues to monitor the economic situation closely in conjunction with key partners, including the Pension Protection Fund and the Financial Services Authority. However, the Regulator is concerned that current difficulties may encourage undesirable behaviour in relation to vulnerable schemes. The April 2009 statement sets out the Regulator’s position in relation to such behaviour.
Dishonesty and fraud
The statement emphasises that good governance is more, and not less, important during tough economic times. While the Regulator accepts that actual cases of dishonesty or fraud are very rare in practice, the risk of such behaviour occurring is real. Examples of dishonesty or fraud include targeting members to access their pension assets through trust busting or other pension liberation activities.
The statement makes it clear that the Regulator will (together with other relevant authorities) take action both to ensure perpetrators are sanctioned and to secure member assets. The Regulator does note that the Fraud Compensation Scheme provides protection for member benefits where fraud has occurred and the scheme employer is either insolvent or is unable to continue to support the scheme.
Behaviours that unacceptably increase risks
The Regulator considers that behaviour that unacceptably increases risks to members’ benefits, the PPF and levy-paying schemes includes avoidance of employer debt, inappropriate transfers from under-funded schemes that would subsequently not have the resources or adequate employer support, employer-related investment and poor practice associated with transfer incentive exercises.
The Regulator comments that it has a variety of powers to sanction such inappropriate behaviour, including powers to remove and appoint trustees, power to reverse transactions at an undervalue and anti-avoidance powers.
Whistle-blowing
Whistle-blowing is a statutory duty that requires everyone involved with the running of both occupational and personal pension schemes (including employers, trustees, advisers and administrators) to report materially significant breaches of legislation or any other rule of law applicable to pension schemes to the Regulator. The Regulator’s code of practice on whistle-blowing sets out a traffic lights system of reporting to indicate when a breach, or series of breaches, would be materially significant. The statement makes clear that any breaches involving dishonesty are likely to be of material significance and should be reported immediately.
The Regulator’s statement emphasises the importance of the whistle-blowing duty. The whistle-blowing duty overrides any other duties a reporter may have, such as any duty of confidentiality. Any such duty is accordingly not breached when a whistle-blowing report is made. However, it is important to note that communications between client trustees/employers and legal advisers do not have to be disclosed under the whistle-blowing requirements.
Comment
The Regulator’s third statement in relation to the economic crisis is a cautionary reminder to everyone involved in pension schemes to be watchful for inappropriate behaviour and then to make the relevant report to the Regulator and the authorities.
The statement is, as were the previous two, very high level. It does not give specific guidance to those involved in pension schemes on the circumstances in which it might use its powers. We feel that this is a missed opportunity. The Regulator polices the whistle-blowing regime by a system of traffic light warnings. The more serious or persistent the breach, the more likely it is to lead to a red light requiring a report to the Regulator. The Regulator could have adopted a similar approach in relation to the ‘behaviours that unacceptably increase risks’ because not all of these ‘behaviours’ are subject to specific Regulator guidance.
The statement also shows the Regulator’s approach to the economic crisis. It is focusing on breaches of regulatory practice, and is not allowing itself to be drawn into the detailed and difficult negotiations that are currently ongoing between trustees and employers under the scheme funding regime.
By Ruth Bamforth, associate practice lawyer, Eversheds LLP.
E-mail: ruthbamforth@eversheds.com.