The Pensions Regulator

Code of practice 01
Reporting breaches of the law

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The decision to report

31. There are two key judgements required:
    • First, does the reporter have reasonable cause to believe there has been a breach of the law?
    • Is so, then, secondly, does the reporter believe the breach is likely to be of material significance to the Pensions Regulator?

    'Reasonable cause to believe'

32. Having a reasonable cause to believe that a breach has occurred means more than merely having a suspicion that cannot be substantiated.

    View related guidance.

33. Where the reporter does not know the facts or events around the suspected breach, it will usually be appropriate to check with the trustees or manager, or with others who are in a position to confirm what has happened. However, it would not be appropriate to check with the trustees or the manager or others in cases of theft, or if the reporter is concerned that a fraud or other serious offence might have been committed and discussion with those persons might alert those implicated or impede the actions of the police or a regulatory authority.

    View related guidance.

34. If the reporter is unclear about the relevant legal provision, they should clarify their understanding of the law to the extent necessary to form a view.

    View related guidance.

35. In establishing that there is reasonable cause to believe that a breach has occurred, it is not necessary for a reporter to gather all the evidence which the Pensions Regulator would require before taking legal action.

    'Likely to be of material significance to the Pensions Regulator'

36. The legal requirement is that breaches likely to be of material significance to the Pensions Regulator in carrying out any of its functions⁹ must be reported. What makes the breach of material significance depends on:
    1. The cause of the breach.
    2. The effect of the breach.
    3. The reaction to the breach.
    4. The wider implications of the breach.
    When reaching a decision whether to report, the reporter should consider these points together. Each of these aspects is considered in more detail below.

    (i) The cause of the breach

    View related guidance.

37. Where the breach was caused by:
    • dishonesty;
    • poor governance, inadequate controls resulting in deficient administration, or slow or inappropriate decision-making practices;
    • incomplete or inaccurate advice; or
    • acting (or failing to act) in deliberate contravention of the law
    the breach is likely to be of material significance to the Pensions Regulator.

    View related guidance.

38. In forming a view on whether the breach is of material significance, reporters should consider other reported and unreported breaches of which they are aware. Reporters should use historical information with care, however, particularly if changes have been made to address previously identified problems.

    View related guidance.

39. On the other hand, the Pensions Regulator will not regard as materially significant a breach arising from an isolated incident, for example resulting from teething problems with a new system or procedure, or from an unusual or unpredictable combination of circumstances. But in such a situation, it is also important to consider other aspects of the breach such as the effect it has had.

    (ii) The effect of the breach

    View related guidance.

40. The Pensions Regulator's objectives are to protect the benefits of pension scheme members, to reduce the risk of calls on the Pension Protection Fund, and to promote the good administration of work-based pension schemes.

    View related guidance.

41. In the light of these objectives, the Pensions Regulator considers the following to be particularly important elements which are likely to be of material significance to the regulator.

    In relation to protecting members' benefits:

    • substantially the right money is paid into the scheme at the right time;
    • assets are appropriately safeguarded;
    • payments out of the scheme are legitimate and timely;
    • defined benefit schemes are complying with the legal requirements on scheme funding;
    • trustees of occupational pension schemes are properly considering their investment policy, and investing in accordance with it;
    • contributions in respect of money purchase members are correctly allocated and invested.

    In relation to reducing the risk of compensation being payable from the PPF:

    • the Pensions Regulator is informed of notifiable events;¹⁰
    • trustees comply with PPF requirements during an assessment period. This is the period starting with an insolvency event and during which the scheme's eligibility for entry into the PPF is assessed and certain restrictions apply. Reports should continue to be made to the Pensions Regulator during the assessment period.

    In relation to promoting good administration:

    • schemes are administered properly and appropriate records maintained;
    • members receive accurate, clear and impartial information without delay.

    (iii) The reaction to the breach

    View related guidance.

42. The Pensions Regulator does not normally regard a breach as materially significant where the trustees or managers (or their advisers and service providers) take prompt and effective action to investigate and correct the breach and its causes, and, where appropriate, to notify any members whose benefits have been affected.

    View related guidance.

43. However, where, after a breach is identified, the trustees and their advisers or service providers involved:
    • do not take prompt and effective action to remedy the breach and identify and tackle its cause in order to minimise risk of recurrence;
    • are not pursuing corrective action to a proper conclusion; or
    • fail to notify members whose benefits have been affected by the breach where it would have been appropriate to do so;

    View related guidance.

44. this is of concern to the Pensions Regulator, and the breach is likely to be of material significance.

    View related guidance.

45. For example, even where only a few members are not receiving benefits due to them, the breach is likely to be materially significant unless prompt and robust action is being taken to remedy the situation.

    (iv) The wider implications of the breach

    View related guidance.

46. The wider implications of a breach should be taken into account when assessing which breaches are likely to be materially significant to the exercise of the Pensions Regulator's functions. For example, a breach is likely to be of material significance where:
    • the fact that the breach has occurred makes it appear more likely that other breaches will emerge in the future because the trustees (or the manager) lack the appropriate knowledge and understanding to fulfil their responsibilities; or
    • other schemes may be affected, for example schemes administered by the same organisation where a system failure is to blame.

    View related guidance.

47. In forming a judgement on whether a particular breach may have wider implications, the reporter should take into account such general risk factors as the level of funding (in a defined benefit scheme) or how well run the scheme appears to be. Some breaches which arise in respect of a poorly funded, poorly administered scheme will be more significant to the Pensions Regulator than the same breaches would be in a well funded, well administered scheme. Such an approach is consistent with the risk-focused approach to regulation adopted by the Pensions Regulator.

    'As soon as reasonably practicable'

48. If a judgement has been reached that there is reasonable cause to believe that a breach has occurred, and that it is of material significance to the Pensions Regulator, it must be reported as soon as reasonably practicable. It is important that procedures are in place to allow reporters to make a judgement within an appropriate timescale as to whether a breach must be reported.
49. What is reasonably practicable depends on the circumstances. In any event the time taken to reach the judgements on reasonable cause to believe and on material significance should be consistent with the speed implied by 'as soon as reasonably practicable'. In particular, the time taken should reflect the seriousness of the suspected breach. In cases of immediate risk to scheme assets, the payment of members' benefits, or where there is any indication of dishonesty, the Pensions Regulator does not expect reporters to seek an explanation or to assess the effectiveness of proposed remedies but only to make such immediate checks as are necessary. The more serious the potential breach and its consequences, the more urgently these necessary checks should be made. In cases of potential dishonesty, the reporter should avoid, where possible, checks which might alert those implicated. In serious cases reporters should consider contacting the Pensions Regulator by the quickest means possible to alert the regulator to the breach.

    Identification of breaches

50. There is no requirement or expectation that reporters should search for breaches.
51. Reporters should nevertheless be alert to breaches relevant to the service or services which they are providing in relation to the scheme. For example, administrators and insurers are expected to be in a position to identify breaches relating to member disclosure, transfer value quotations and payments, payment of benefits and receipt of contributions.
52. There are some breaches that all reporters should be alert to, in particular any dishonest behaviour.

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