Industry calls for clarity on TPR’s enforcement powers

TPR launched its consultation in May setting out its draft enforcement powers policy, which aimed in part to consolidate existing policies governing defined benefit, hybrid, public sector and defined contribution pension schemes.

The draft policy explained, among other things, what approach will be taken when TPR’s powers overlap, while also covering its information-gathering powers and the penalties it plans to impose for non-compliance.

Given that the guidance is not legally binding on trustees and employers and TPR’s website states that there is no penalty for failing to comply with codes of practice, we consider it is completely inappropriate for non-compliance with TPR guidance to be a factor in determining whether TPR should use its criminal powers

The Society of Pension Professionals

The draft policy explained that TPR’s priority for engagement will be determined in large part by an assessment of risks and harm, and laid out the factors considered when deciding on the level of engagement or enforcement action.

Assessment outcomes subject to ‘luck’?

In its draft scheme enforcement policy, TPR set out its approach to the assessment of risk and harm, in which it explained it would consider “a broad range of factors to develop a rounded view of a particular scheme’s circumstances, management and/or administration before making a judgment on the appropriate intervention and/or enforcement action”.

Specifically, it said it would consider factors including (but not limited to) the level of harm or risk of future harm, the size of scheme liabilities, the number of members affected, the type of breach, compliance history and historic risks, and any previous interactions with or engagements by the regulator.

It added, however, that “individual factors may be given more or less weight depending on our strategic priorities at that time”, which Willis Towers Watson took issue with in its response to the consultation.

“While we understand the point that is made [...], this indicates that there is not only a degree of subjectivity in how TPR will apply its powers, but an element of ‘luck’ with the outcome being determined by the ‘strategic priorities’ in place at the time an investigation is undertaken,” WTW explained.

“We are not convinced that this is appropriate or helpful, and question whether it is appropriate to include in this policy.”

The Pensions and Lifetime Savings Association echoed this concern, and stated: “It is not clear why the weighting applied to these individual factors should vary based on the evolving strategic priorities of TPR. We recommend TPR remove this sentence as, in its current form, it would no longer act as a deterrent and would make this policy less effective.”

WTW also called for the regulator to be more specific in its section on prevention, where it talks about replacing trustees where trustee action or inaction leads to a loss of pension savings, for example through pension scams.

WTW said that, based on its reading of regulatory intervention reports, this was likely to occur “in the context of schemes established for the purpose of receiving transfer values from other schemes for subsequent investment in ‘highly risky’ assets or, indeed, for the misappropriation of funds”.

However, it cautioned that TPR’s draft policy might not be sufficiently clear on this point, calling on the regulator to “spell this out rather than unduly worrying trustees of well-run pension schemes who, despite appropriate due diligence measures, inadvertently end up transferring a member’s pension rights to an arrangement that later proves to be, at best, poorly managed or, at worst, a scam vehicle”.

This point was echoed by the Society of Pensions Professionals in its own response, which added that there was some uncertainty arising from the “enforcement outcomes remedy” section of the draft policy.

That section reads: “We may also seek to improve a scheme’s security or financial position, even where there has been no contravention of any obligations under pensions legislation.”

The SPP warned that the wording did not make it clear “what sort of situations TPR has in mind here and so further clarity on when TPR might seek to do this would be helpful”.

Cardano, meanwhile, pointed out that the inclusion of “level of harm or risk of future harm” as a factor was undermined by the absence of any definition of harm, “including what falls under the definition, how it might be quantified (if at all) and what factors feed into its assessment. Further commentary in this regard may be helpful for the reader, in our view”.

Intervention appears subjective

Similar points were raised with regard to the draft enforcement policy by Pensions Management Institute president Lesley Alexander, who said that the PMI was supportive of the work being done by the regulator, but concerned that the draft policy was unclear on the “relevant factors” used to judge the appropriate type and scale of intervention.

“For the same set of facts, two individuals could conceivably draw different conclusions on the appropriate intervention. Moreover, the draft policy in many places notes that some or all of TPR’s enforcement powers may be appropriate, so in practice it is not obvious, for a given set of facts, exactly which enforcement action would be undertaken (if indeed that is the intention of the policy),” she wrote.

Alexander likewise highlighted that sections of the draft prosecution policy were “extremely wide”, leading to “some uncertainty as to how the process would work”.

This was a particular concern over TPR’s factors that would call for an investigation, which she said were “very broad”.

“For example, with the reference to ‘some other unfairness in the treatment of the scheme’, there is a lack of clarity as to what the threshold is for something being ‘unfair’ and so we recommend that examples be provided,” she wrote.

“Similarly, providing examples as to what would constitute a ‘risk to public confidence in pension scheme and pension savings’ in section 18 would be beneficial. Furthermore, we question whether the factor ‘non-compliance with our guidance’ [...] should be a reason for investigation as compliance with guidance is not a strict legal requirement.”

The SPP, meanwhile, took issue TPR’s inclusion in the draft enforcement policy of “consideration of our available resources” as a factor determining whether or not to investigate an alleged offence.

“It would be helpful to understand exactly what TPR means by this as it seems, potentially, to lead to a conclusion that an investigation might otherwise have been undertaken had it not been for the fact that TPR did not have sufficient personnel or other resources to take it forward,” the SPP said.

“We are not sure — if this is what is meant in the policy — that this should be a factor in determining whether or not to investigate.”

Finally, on the section of the enforcement policy relating to use of the regulator’s new criminal powers, the SPP criticised the inclusion of non-compliance with guidance as a factor.

“Given that the guidance is not legally binding on trustees and employers and TPR’s website states that there is no penalty for failing to comply with codes of practice, we consider that it is completely inappropriate for non-compliance with TPR guidance to be a factor in determining whether TPR should use its criminal powers,” it stated.