Regulator exposes widespread DC legal breaches
Trustees in breach of duties to members
A Pensions Regulator investigation into the quality of pre-retirement literature has found that almost a third of all DC schemes are in breach of legislative requirements.
The Regulator assessed 97 trust-based DC schemes on adherence to legislative requirements, good practice – e.g. the description and prominence of the Open Market Option (OMO) – and the use of clear, plain English.
The report found that 30 per cent of DC schemes had alleged legislative breaches of retirement disclosure regulations.
Trustees are legally responsible for ensuring that the scheme sends out the correct communications to members at the correct time, even if it is an insurer that actually sends the information to members. The publication of the report can be considered a wake up call for trustees, as it is their responsibility to check the information that goes out to their members.
The Regulator stressed that these are ‘alleged’ breaches and the conclusion is based only on submitted information – a full investigation may show a different rate of compliance – and the sample may not be representative of all DC schemes. The Regulator defines ‘breaches’ as potential or alleged breaches identified by the Pensions Regulator’s staff and should not be construed as determinations of the Regulator’s Determination Panel or findings of a court.
A large proportion of the alleged breaches that were discovered by the Regulator were over relatively minor issues such as timing. For example, one of the more common instances was of schemes braking a legislative requirement to send out a particular document at least six months prior to a member's official retirement date.
All DC schemes must offer the OMO to members under the Finance Act 2004.
If a scheme is trust-based, the trustees have a legal responsibility to provide specific information to members at least six months before their intended retirement date. The Occupational Pension Schemes (Disclosure of Information) Regulations 1996 requires statements to be issued setting out that:
- the member is able to select an annuity
- the member is able to select the annuity provider (where that applies under the scheme rules)
- different annuities have different features and different rates of payment and giving some examples of the different types of annuity that are available, including: level annuities and increasing annuities; single life and joint life annuities; annuities with or without guarantee periods
- the member should consider taking advice on the most suitable annuities for their needs
The Regulator says that the Association of British Insurers guidance and template letter is a good practice starting point, which schemes must adapt this to suit their individual circumstances.
The report, A review of retirement information for DC members, also found:
- 57 per cent had some scope for improvement in the standards of the retirement information sent to members
- The take up rate of the open market option was low at 23 per cent, although it was offered by 98 per cent of schemes
- 6 per cent were referred to Regulator casework teams to make required, substantial changes
A letter will now be sent to 4,500 DC schemes highlighting the findings and urging trustees to review their arrangements.
June Mulroy, executive director of operations at the Pensions Regulator said: “Compliance with the legislative requirements is important as a minimum standard.
“But we expect to see adoption of good practice as the norm. This will help members to make the right decisions at retirement, which we recognise can make a significant difference to the income they receive.”
Despite the widespread breach of the Regulator’s guidelines Mulroy offered only mild criticism: “It is encouraging to see examples of excellent practice, but we do recognise that there is room for improvement.”
The full report can be read here: A review of retirement information for DC members.
Statement from the Regulator: Potential legal action that could be taken on schemes in legislative breach
"If a member believes they have missed out because of the actions of the trustees it would take the form of an individual complaint. The member would need to go though the internal dispute resolution procedure. If this doesn't find a resolution they could approach the ombudsman. The member can take legal advice or action.
The 30 per cent of schemes that we assessed to be in breach of legislative requirements will all be contacted individually to point out the issues we found and to ask them to rectify certain issues. We will make it clear that we will expect to be able to go back to them again and find the issues resolved.
As mentioned most of the breaches were minor, in issues like timeliness, where the trustees have not abided by the six month rule.
The 6 per cent of schemes who we viewed as having breaches which were materially detrimental have all been assigned a case manager and will be investigated further.
As all breaches are currently still alleged and based only on the info sent to us we will not take any immediate action.
However, we do want this to be a wake up call for trustees. They need to realise that the rules are very clear, are there for a reason, and that they are in the end responsible for the information that their members get.
Trustees could indeed face questions or complaints from members and that is one reason for us carrying out the investigation - to highlight the areas where trustees and insurers should be particularly vigilant and to provide suggestions on ways that they can avoid these situations."