Sackers’ Response to TPR Consultation on Maintaining Contributions

Background

The consultation by TPR on “Maintaining contributions” (the Consultation), includes revised codes of practice on the late payment of contributions to occupational DC and personal pension schemes (TPR codes 5 and 6), together with two new sets of accompanying guidance.

As TPR notes, the introduction of auto-enrolment “does not fundamentally alter any of the existing legislative requirements on the payment of contributions” to pension schemes, nor does it alter “the role and responsibilities of those involved with the set up and administration of DC pension schemes to monitor contributions and make reports to the regulator”. Nonetheless, the commencement of the new auto-enrolment duties presents a good opportunity for TPR to review its codes of practice on the late payment of contributions, with a view to ensuring “that there is clarity about the different parties involved in the flow of contributions and a clear understanding of the appropriate accountabilities for achieving good member outcomes”. We welcome TPR’s move to update its codes of practice at this time.

As advisers to trustees and employers of occupational pension schemes principally, we have restricted our comments to the parts of the consultation relating to code no.5 on occupational pension schemes and we have not sought to answer every consultation question.

In this response:

• Proposed increase in the time filter for reporting late contributions
  
• Monitoring and reconciliation
  
• Guidance accompanying code of practice no.5
• Guidance for employers
  

Proposed increase in the time filter for reporting late contributions

On the reporting of late contributions, TPR proposes changing the current measure of 90 days outstanding to one where the trustees identify that the employer is unwilling to pay, or 120 days after the due date if a contribution remains outstanding at this point.

TPR already requires reports where the trustees have reasonable cause to believe that the late payment of contributions is material, with a particular focus on:

• employers who are wilfully or deliberately not paying;
• systematic payment failures; and
• payment failures where this is evidence of dishonesty, fraudulent evasion or misuse of pension scheme assets.

The Consultation notes that the new measure for reporting will be the identification by the trustees or managers of the employer’s unwillingness to pay, taking such unwillingness as read where 120 days have elapsed. However, it also notes that those trustees who currently make early contact with employers during the existing 90 day period before reporting late payments to TPR, experience a high rate of resolution of contribution issues.

Our experience supports the view that early engagement with employers enables trustees to resolve issues relating to late payments within the existing 90 day period and that this is sufficient time to enable trustees to determine whether such issues are materially significant to the scheme concerned. We would therefore welcome TPR’s view on the rationale for extending this period by an additional 30 days.

Monitoring and reconciliation

The draft revised code puts the onus on trustees to have processes in place to check the contributions that fall to be paid under the payment schedule and to reconcile these with what is actually paid into the scheme.

In practice, this is often dealt with between the employer’s payroll provider and the trustees’ third party administrator. Except perhaps in very small schemes, it can be difficult for trustees to monitor this information on a regular basis. By way of example, where pensionable pay is based on fluctuating emoluments, the level of contributions to the pension scheme can vary from one pay period to the next, for some or all of the members. It may therefore be unrealistic to expect employers to provide trustees with this information and for the trustees themselves to carry out a full reconciliation exercise in each pay period.

Compliance in the context of multi-employer schemes, such as master trusts, is likely to be particularly complex, for example, where different employers have different payment dates. This could mean that reconciliation of contributions becomes an almost daily task for trustees.

While trustees have a legal duty to monitor those parties to whom they delegate day-to-day administrative responsibilities, we would welcome greater acknowledgement in the code of the practical issues that arise in terms of monitoring and reconciling contributions. It would also be helpful for trustees to be able to have a greater understanding as to what support they can seek from TPR, where they encounter significant difficulties in resolving contribution issues with their employer. Examples could help with both these issues.

Providing information to members

Part II of the revised draft code refers to the disclosure requirements for occupational DC pension schemes, in terms of the basic scheme information for prospective members and new joiners, and annual benefit statements for members. However, it goes further than the legislative requirements, suggesting detailed information relating to contributions that should be provided to members. While we support moves to ensure the clarity and transparency of the information provided to members, it is also important to ensure that the requirements are not so detailed that they result in an overly complicated or confusing message for the recipient.

The provisions of Part II also appear to place a responsibility on members to check the information on contributions, which does not exist currently. As noted in 3.2 above, in practice it will primarily be the responsibility of the employer and their payroll provider, and any third party administrator to the scheme, to ensure that this information is correct.

Guidance accompanying code of practice no.5

The addition of new guidance, which aims to provide practical advice to supplement the code, is welcome. In particular, the comments relating to the steps to be taken when setting up a new scheme will be helpful for those tackling pension provision for the first time as a result of auto-enrolment. Some of the background set out in the Consultation, such as that relating to the parties involved and the legal requirements for trustees, is very helpful and could usefully be included in the guidance.

The middle paragraph in the right hand column on page 23 is not entirely clear. In addition, as noted in relation to monitoring and administration, this level of administration will often be the responsibility of third parties. It would therefore be helpful for trustees if this were acknowledged in the guidance.

Whilst we recognise the need for trustees to achieve actual communication with the employer to resolve any issue of unpaid contributions, the requirement to make at least one contact with the employer by phone is, in our view, overly prescriptive . From a governance perspective, it is also more difficult to demonstrate that a contact attempt with the employer has been made, when this has been done by phone (particularly if the attempt is unsuccessful). By contrast, where trustees make contact via email or other correspondence in writing, it is easier to demonstrate when contact was attempted and the extent of the communication. The key here is for trustees to attempt communication (on several occasions if initially unsuccessful) and to keep a record that clearly demonstrates the steps they have taken.

We also recognise that the focus of the draft codes and guidance is on the reporting of the late payment of contributions. However, given the potentially significant impact for DC members of the resulting late investment of those contributions, it would also be helpful to cover the actions trustees should take in respect of late investment in the guidance.

Guidance for employers

We note that TPR also proposes to issue guidance for employers “so that they understand their responsibilities in maintaining the flow of contributions”. As control of the contribution processes ultimately rests with the employer, this guidance will be a key part of TPR’s codes and guidance in this area, particularly in view of the number of new employers involved in pensions as a result of auto-enrolment.

Given that the employer guidance will need to dovetail with the guidance for trustees, it would be helpful to know what timeframe TPR envisages for the issue of this guidance (and whether TPR intends to consult on this guidance as well), with a draft being available as soon as practicable.