Background - the Pensions Regulator's powers and use
Trustees of 'relevant schemes' providing defined contribution (DC) benefits must prepare a chair's statement containing prescribed information within seven months of the end of the scheme year. The statement covers four specific areas:
- governance of the default arrangement;
- the processing of core financial transactions;
- charges and transaction costs (including value for members); and
- trustee knowledge and understanding.
Failure to prepare a compliant chair's statement attracts a mandatory penalty levied by the Pensions Regulator (TPR) of between £500 and £2,000. In Q3 2019, TPR imposed 28 such penalties.
TPR's published policy states that a scheme with a professional trustee will receive the maximum penalty of £2,000. Where there is no professional trustee, the minimum £500 penalty will, subject to the £2,000 cap, increase by 10p per member with money purchase benefits, and the total will double where there has been a previous beach in the last three years.
Trustees can ask TPR to review its decision to impose a penalty within 28 days of its issuing the penalty notice. Trustees can also appeal TPR's decision to the First-Tier Tribunal and there are examples of trustees having done so.
The best defence for a scheme subject to the requirement to prepare a chair's statement is, of course, to prepare a compliant statement in the first place. So how can trustees maximise their chances of doing so and avoid a fine?
Four-step plan for avoiding a fine
Lessons can be learnt from our extensive experience advising clients on the preparation of chair's statements and dealing with TPR in relation to them. TPR's publications, particularly its 'quick guide to the chair's statement', also contain useful guidance and examples of common mistakes.
We recommend the following four steps.
Step 1: know whether the scheme is a 'relevant scheme'
It is important to be clear if the scheme in question is a 'relevant scheme' and so subject to the requirement to prepare a chair's statement. Broadly, the requirement applies to most schemes with money purchase benefits other than additional voluntary contributions (AVCs).
However, tricky issues can arise. For example, in a defined benefit (DB) scheme with DC AVCs, are the trustees confident that all DC benefits are AVCs where there have been DC transfers in? Are DB schemes with DC underpins included? What about DB schemes that allow transfers-in of DC benefits at retirement to fund tax-free cash? It is worth taking legal advice if the position for a scheme is not clear.
Step 2: follow the detail of TPR's guidance
We strongly recommend you follow the detail not just of the requirements set out in the regulations in relation to the content of the chair's statement but also TPR's guidance documents. TPR is required to issue a penalty where it is "of the opinion that" the trustees have failed to prepare a compliant statement. There is evidence that TPR (and the First-Tier Tribunal that hears appeals) is levying penalties where the requirements of the regulations have arguably been met but its guidance has not been complied with.
Step 3: provide plenty of detail
TPR is clear that it wants to see a "meaningful narrative" in plain English of how, and the extent to which, governance standards have been met, the measures the trustees took to achieve compliance, and how the trustees have reached their conclusions on the extent of compliance. This necessitates detail. A short, high-level summary risks a penalty. Statements need to be member-friendly and tailored to the membership of the particular scheme, but also informative. It can be a difficult balance to provide all the details required by TPR while keeping the content sufficiently concise and meaningful for members.
Step 4: prepare and gather evidence through the year
Many of the aspects that need to be reported on in the chair's statement relate to governance actions that have been taken through the scheme year, for example trustee training and the supervision of administration processes. Trustees should have processes in place to gather supporting evidence as they go. It can also take some time to get full costs and charges information, so early engagement with providers is key. We recommend that trustees have a checklist, set diary reminders and check back regularly throughout the year to make sure their scheme is taking all of the steps it needs to in order to provide all of the information and confirmations that TPR is looking for.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
