Revised codes and guidance on late payment of contributions

Introduction

Following a consultation in autumn 2012,1 TPR has published revised codes and guidance on reporting late payment of contributions to occupational DC (no.5) and personal (no.6) pension schemes (together the “Codes”).

In this Alert:

• Key points
• Background
• Response to consultation
• The Codes
• Monitoring contributions
• Reporting material payment failures to TPR
• What failures are likely to be material?
• Next steps

Key points

• The new Codes will apply to all DC occupational and personal pension schemes, regardless of the number of members.
• Before reporting an employer to TPR for failing to make a payment, TPR considers that trustees of occupational pension schemes and managers of personal pension arrangements should attempt to contact the employer a minimum of three times (at least once by phone) requesting payment and an explanation.
• Trustees / managers must effectively monitor contributions in order to fulfil their duty to identify and report material payment failures to TPR.
• A report must always be made where contributions have been outstanding for 90 days (rather than 120 days as proposed in the consultation).

Background

TPR considered that the introduction of automatic enrolment was the right time to review the Codes. Its aim is to ensure that the Codes remain appropriate given the increasing number of employers using pension schemes, and the projected growth in pension membership that lies ahead.

As the majority of automatic enrolment schemes are anticipated to be DC, Code of Practice no.3 – Funding defined benefits – was not included in the review.

Response to consultation

The consultation drafts of the Codes appeared to impose new, potentially onerous, monitoring duties on trustees and managers. TPR has now confirmed that this was not its intention.

In its response, TPR confirms that primary responsibility for ensuring that the correct level of contribution is paid to the scheme in a timely manner rests with employers, with employees also bearing responsibility for checking their contributions. (TPR’s research shows that best practice amongst many trustees / managers is to provide members with access to online contribution and payments information to help them monitor scheme contributions.)

Employer guidance will be issued alongside the amended Codes and guidance. It will cover the employer’s responsibility to understand what is due to be paid to the scheme and by when, and how to calculate, deduct and pay over contributions to the scheme.

The Codes

The Codes set out how trustees of occupational schemes and managers of personal pension schemes should meet their obligations and duties to:

• monitor the payment of contributions to be paid under the payment schedule / direct payment arrangements (as appropriate);
• provide the necessary information to enable members to check contributions; and
• report material payment failures to TPR and to members within a reasonable period.

Monitoring contributions

Trustees should have appropriate risk based systems in place to monitor contributions and identify payment failures. Managers of personal pension schemes should also be able to identify any under or overpayments.

To assist trustees / managers in developing suitable risk based systems, the Codes and guidance now include more information on effective monitoring processes, as well as TPR’s view on higher risk situations which may require greater intervention. The type of situation or characteristic that may indicate higher risk includes:

• employers who have demonstrated a past history of errors or repeated late or underpayment of contributions;
• employers who use manual payroll processes or a payroll provider that has supplied inaccurate pension contributions or pensionable pay data in the past;
• employers who provide manual payment information to the trustees / managers, or who have not provided accurate and timely payment information in the past; and
• unexpected fluctuations in the level of contributions where the trustees / managers would normally expect contribution levels to be consistent.

Where a higher risk situation is identified, the Code states that trustees / managers should carry out checks to ascertain whether contributions are being paid in accordance with the payment schedule / direct payment arrangements. The degree and type of checks required will depend on the risk identified and the circumstances of the case, but may range from random contribution sampling to a full audit of contributions.

Reporting material payment failures to TPR

Except in exceptional circumstances,2 a material payment failure must be reported to TPR within a “reasonable period.”3 A material payment failure takes place when:

• contribution payments and other amounts under the payment schedule / direct payment arrangement are not paid to the scheme by the due date(s); and
• there is “reasonable cause to believe”4 that this failure is likely to be of material significance to TPR in the exercise of its functions.

Trustees / managers are not expected to undertake a full investigation to establish materiality or investigate whether an employer has committed fraudulent behaviour. However, they should try to establish with the employer what the cause and circumstances of the payment failure are and what action has been taken by the employer as a result of the payment failure. The wider implications or impact of the payment failure, for example on member benefits, also needs to be borne in mind.

What failures are likely to be material?

The Code identifies a number of circumstances which are likely to be material and which should be reported. These include:

• where trustees / managers have reasonable cause to believe that the employer is not willing to pay the outstanding contributions;
• where there is a failure to pay contributions involving possible dishonesty or a misuse of assets or contributions; and
• in any event, where contributions have been outstanding for 90 days from the due date.

The Codes also set out circumstances where a report will not normally be expected. For example, where contributions are paid late but in full and within 90 days of the due date.

Next steps

The Codes have now been laid before Parliament and are expected to come into force in autumn 2013.

1 See our Alert: “TPR consults on revised “contribution” codes and accompanying guidance” dated 3 October 2012
2 If there is a current or imminent danger to members’ and/or the employer’s payments unless immediate preventative action is taken, a report should be made as soon as possible, by phone.
3 Within ten working days
4 This means having “more than an unsubstantiated suspicion”