Early warning system alerts regulator to possible calls on PPF

The Pensions Regulator's timetable for bringing into effect its code of practice on notifiable events was disrupted by the general election. Although trustees and employers have been required to act in accordance with the draft code since April, it has only just received formal parliamentary approval. We examine its provisions.

Among the less well publicised casualties of the calling of the general election was the Pensions Regulator's code of practice on notifiable events. Although consultation on the code had been completed, it was not approved before the dissolution of parliament. With the Pensions Act 2004 requiring that the final version of each of the regulator's codes be laid before parliament for 40 days, it is only now that the code* has been approved.

This presented the regulator with something of a dilemma because the Regulations and directions^† that itemise the notifiable events and exceptions referred to in the code actually took effect on 6 April 2005. To deal with this problem, the regulator issued a letter explaining the delay and advising schemes that, until the code was approved, they must refer to the draft laid before parliament for guidance. Luckily for the regulator, no changes were made to the substance of the draft during the approval process.

Unlike the statutory duty to report breaches of the law (See New whistleblowing code ), which is an extension of an existing duty, the duty to notify the regulator about certain events is newly imposed by the Pensions Act. The purpose of the duty is to assist the regulator in meeting its statutory objective of reducing the risks of situations arising that may lead to calls on the Pension Protection Fund (PPF).

The company and scheme events that have to be notified are ones that could suggest forthcoming financial difficulties that might result in the PPF having to assist a scheme. However, the code points out that, taken in isolation, a notifiable event gives no indication of the financial position of an employer or of its pension scheme. Given its purpose to safeguard members and the PPF, the duty only applies in respect of schemes that are in scope to the PPF - ones that provide defined benefits or that have a defined-benefit (DB) element, such as hybrid schemes.

Once the regulator receives a report made in accordance with the provisions of the code, it then assesses the risk to the scheme. It will use other information, such as that included in the annual return, to determine its response. If it believes a scheme to be at risk, it has a range of actions available, including imposing improvement notices or appointing an independent trustee.

Extensive requirements

Depending on the circumstances, the duty to notify the regulator of certain events falls on scheme trustees, both collectively and as individuals, managers of schemes and employers. Notifiable events fall into two categories: those that must be notified by trustees (or managers) and those that must be notified by employers. Unfortunately, in order to determine which events are notifiable, those with the duty must look outside the code to the Regulations to find details.

The regulator explains that it has adopted this approach to provide greater flexibility. If the notifiable events and exceptions were contained within the code, the code would have to go through the full consultation and approval procedure every time the notifiable events are amended.

Box 1 summarises the current list of events that must be notified to the regulator. As can be seen, the list is extensive. Some respondents to the consultation commented that the code increases the regulatory burden on DB plans, giving rise to the risk that some employers will pull out of this type of provision.

However, the number of notifiable events is fewer than originally proposed. The consultation report gives details of the events that have been removed from the final list. These include a requirement to notify the regulator if more than a certain number of employees are made redundant, and also if there is a significant reduction in the number of scheme members. Respondents took the view that neither event indicated that a call on the PPF would result from such actions. Furthermore, small schemes might have needed to notify the regulator when two or three members left, as this could be a "significant reduction".

Confidentiality

Some organisations are concerned that their share price could be affected if they have to reveal some of the information required by the regulator within the given time limits. The regulator is aware of these difficulties, but insists that the duty on trustees and employers to notify overrides any other duty of confidentiality. It points out that events it is notified of do not have to be announced publicly or, in many instances, even to shareholders.

In defence of its stance on notification, it points out that:

In spite of these reassurances, it is likely that some companies will feel that the confidentiality of their business activities is threatened.

Exceptions to the rule

Under the provisions of the Pensions Act, the regulator has the power to make directions concerning the circumstances in which trustees, managers or employers do not have to report a notifiable event.

Version 1 of the directions took effect from 6 April 2005. These too have not been included in the code itself in order to maintain flexibility. The label "version 1" suggests that the regulator is likely to make more changes in this area as its experience of the practical effects of the code expands.

Box 2 summarises the current exceptions to the duty to report certain events. Although not couched in these particular terms, effectively the regulator does not need to be informed that a notifiable event has occurred in most instances if the scheme is funded above PPF buyout level and the schedule of contributions has been adhered to. However, there are some events that the regulator should be notified of, regardless of the funding position of the scheme. These are specified in box 1.

Timing of notifications

The regulator expects to be notified of events in writing "as soon as reasonably practicable". This term is explained in more detail in the code of practice on reporting breaches of the law (See New whistleblowing code ). In the notifiable events code, the regulator confines itself to commenting that in all cases the term implies urgency.

It also points out that this means that procedures for notification will need to be in place outside the usual framework for discussion of pension matters, such as quarterly trustee meetings. Procedures will also be required to ensure that administrators alert trustees and managers when something occurs that requires a report to be made.

According to the regulator, the list of events has been worded so as to indicate the timing of the notification. Hence, the regulator has to be advised of some events when the relevant decision has been made. But others, such as changes in key personnel, often need only be notified after the event. Unlike the duty to report breaches of the law, where a view sometimes has to be taken on whether the circumstances warrant a report, the regulator believes that notifiable events should be easy to identify.

Notifications must be made in writing, using wherever possible the standard form available on the regulator's website. Those under the duty to notify the regulator of certain events must comply with that duty unless they have reasonable excuse not to do so. If there is a failure to notify, the regulator will assess this failure by reference to whether an objective person would consider this reasonable (although the wording of the test is slightly different for employers and trustees).

If the regulator believes that there has been a failure to comply with the duty, it has a range of possible responses available to it, from organising training for trustees to imposing civil penalties. It may take a failure to notify into account when deciding whether to issue a contribution notice.

Properly prepared

In order to meet their obligations under the notifiable events code, the regulator points to three practical action points for trustees and employers. They should:

* "Regulatory code of practice 02: Notifiable events", available from the Pensions Regulator's website (www.thepensionsregulator.gov.uk ) via "Codes and guidance", "Codes of practice" and then "Codes in force".

^† Pensions Regulator (Notifiable Events) Regulations 2005 (SI 2005/900) and "Directions issued by the Pensions Regulator under s.69(1) of the Pensions Act 2004. Version 1 - dated 6 April 2005", both available from the same page of the Pensions Regulator's website as the code (see above).