Regulator sets out draft approach to compliance and enforcement for DC pension schemes

It has included a "risk proportionality framework" within its draft approach to trust-based DC compliance and enforcement, which will be used by the regulator to help it decide how to enforce the law in cases of non-compliance. The Pensions Regulator's new Code of Practice for DC schemes is due to come into force next month; and the consultation on its draft enforcement policy will close at the end of October.

According to the draft policy, the regulator intends to carry out "proactive work" to monitor how the legal requirements are being met, as well as investigating breaches of legislation that are brought to its attention by 'whistleblowers' or as a result of its own monitoring of market trends. It intends to carry out regular thematic reviews, focusing on particular risk areas or sections of the market, in order to inform its ongoing regulatory work.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the introduction of thematic reviews was a "new departure" for the regulator, along the lines of that adopted by financial services regulator the Financial Conduct Authority (FCA).

"Trustees and advisers will need to ready themselves for potential requests for information," he said. "Once the new regime is in place it will not just be a matter of ensuring legislation and guidance is complied with - it will be having a paper trail to show that procedures have been put in place to ensure compliance."

"Schemes should bear in mind that the regulator will wish to show that the thematic review is having an impact – and the most obvious way to do that is by publically taking enforcement action in relation to some non-compliant schemes," he said.

In a DC scheme, the benefits provided on retirement depend on the performance of the saver's investment. The regulator finalised its Code of Practice for these schemes earlier this year, following the start of the Government's automatic enrolment programme under which between five and eight million more people are expected to begin saving towards their retirement. The regulator's Codes of Practice are not statements of law, but rather set out what trustees need to know in order to comply with their legal responsibilities.

The new document is intended to be read alongside this Code of Practice. It sets out the regulator's expectations for compliance with the relevant legislation, and how it will enforce the law in cases of non-compliance. It does not apply to contract-based schemes, which are regulated by the FCA, or to breaches of the employer auto-enrolment duties, which are subject to a separate regime.

According to the draft, the Pensions Regulator proposes to carry out an "ongoing programme" of thematic reviews, for which trustees and advisers will be expected to provide information about their schemes on a 'comply or explain' basis. Thematic reviews that uncover "practices that are concerning" to the regulator or which "indicate breaches of the law" may lead to further investigation and formal enforcement action against individual schemes.

The regulator said that it would usually gather further information from trustee meeting minutes, governance statements and service agreements with advisers before proceeding to enforcement action, unless it suspects a "serious breach". When deciding whether to take enforcement action against a particular scheme, it would consider a non-exhaustive list of factors including the financial impact of the breach, the number of members affected and the trustees' previous compliance track record.

The document also sets out the enforcement actions that would be available to the regulator against trustees and third parties, such as scheme administrators, if it discovers that a breach of the legislation has occurred. These range from informal letters, telephone calls and face-to-face meetings, to statutory notices and civil penalties. The maximum fine for each breach is £5,000 for individuals and up to £50,000 in other cases. The Pensions Regulator also has statutory powers to recover unpaid contributions and ban or suspect trustees that are not "fit and proper" for the role.

According to the regulator's DC risk framework, the biggest areas of risk to DC schemes are of poor governance and poor administration. It also intends to monitor investment governance and decision-making, as well as instances of pension liberation fraud and other types of fraudulent activity alongside other law enforcement agencies.