'Notifiable events' The Pensions Act 2004

From 6 April 2005, trustees and employers will find themselves under an obligation to notify the Regulator in relation to a wide range of events. The new regime will come as a shock to many employers who have not been subject to a strict reporting regime before. Even trustees will have to be more alert to the reporting requirement under the new regime than previously under the Pensions Act 1995.

This note is based on the provisions of Section 69 of the Pensions Act 2004, draft Regulations and a draft Code of Practice from the Regulator (the Code). Given the short timescale to April 2005 (effective date of these provisions), we do not expect substantial changes in the final versions. It is important that trustees and employers start to understand the new regime as soon as possible. However, we will highlight any significant changes in the final versions of the documents in a further briefing.

Who must notify?

The duty to notify falls on trustees and managers individually in respect of scheme-related events, and participating employers (including former ones) in respect of employerrelated events.

Trustees must take 'all reasonable steps' to comply with the notifiable events framework. The Code indicates that this will be interpreted as whether, in the event of a failure to notify when a scheme-related event has occurred, an objective person would consider that the trustees took all steps it would be reasonable to expect them to take.

Employers must comply with the duty to notify unless they have 'reasonable excuse' for not doing so. This will be interpreted as whether, when an employer-related event has occurred, an objective person would consider that there was a reasonable basis for the failure to notify.

In practice, this means that trustees and employers must be familiar with the events which are notifiable and have adequate procedures in place which enable notification to occur.

Although professional advisers do not fall within the notifable events framework, if they become aware of a failure to notify on the part of the trustees or employer, the Regulator will expect them to report it as a breach of pensions legislation likely to be of material significance to the Regulator (see briefing note on reporting breaches of the law).

What is a notifiable event?

The main aim behind the notifiable events framework is to reduce the risks of a call being made on the Pensions Protection Fund (PPF) by acting as an early warning system. This was taken into account in preparing the list of notifiable events.

The current list of notifiable events is set out in draft Regulations which were published by the department for work and pensions (DWP) on 3 March 2005. Guidance is contained in the draft Code which was published by the DWP in December 2004. Consultation on the draft Regulations and the draft Code was completed on 4 March 2005. We are therefore now waiting for the final versions of the Code and Regulations.

It is debatable whether some of the events usefully achieve their aim in a manner that is proportionate and risk-based. We have fed this back as part of the consultation. There is clearly some overlap between the notifiable events framework and the 'moral hazard' provisions of the Pensions Act 2004.

The notifiable events are split into scheme-related events and employer-related events. The basis for selecting the schemerelated events is the potential impact on scheme funding. For employer-related events the basis is the potential impact on employer solvency and the strength of the employer covenant. A list summarising the currently drafted notifiable events is set out in the appendix to this note.

Some of the notifiable events are deemed to be serious. These 'serious events' must be notified automatically. Non-serious events are notifiable unless the scheme is funded above the PPF buy out level and there has not been a report by the trustees of a materially significant failure by the employer to pay contributions in accordance with the schedule of contributions (guidelines on what constitutes a materially significant failure will be published in the Code of Practice on scheme funding).

It is proposed in the draft Code that there will be a transitional period up until April 2009 where trustees and employers do not need to notify if the scheme's funding is at or above the PPF buy out level, or 100% funded on an MFR basis at the most recent MFR valuation if the PPF buy out level is not known. After April 2009 only the PPF buy out level will be relevant.

How does notification work in practice?

The reporting of a notifiable event must be done 'as soon as reasonably practicable'. The Regulator has indicated that this should be no longer than five working days, although this has met with some objections. However, trustees and employers will have to use their judgement to decide whether the circumstances require immediate notification. The larger the potential risk to the PPF (for example events which indicate employer insolvency), the sooner notification is required. Reports should be made in writing and contain, as a minimum, the name of scheme, the type of notifiable event and the name of the employer. A web-based form (to be made available on the Regulator's website) is being developed for these purposes.

The Regulator will aim to acknowledge receipt of a notification within five working days. Follow-up to the notification by the Regulator will depend on the seriousness of the event.

What happens in the event of a failure to notify?

If the Regulator becomes aware of a failure to notify it will seek an explanation. If this is not adequate, the Regulator has a range of actions it can take under the Pensions Act 2004. These range from providing information and education to orders to 'freeze' schemes and to issue contribution notices.

Comment

The notifiable events framework places more extensive obligations on trustees and employers than ever before. It is important that those persons with reporting obligations familiarise themselves with the draft Code on notifiable events, before the new regime comes into force. Training should be made available for those who will be involved in reporting and adequate procedures should be put in place so that reporting happens when it should do with a minimum amount of disruption.

The Regulator recognises that this new regime will need to be reviewed to see how effective it is in practice. It therefore proposes a full review after one year.

The Regulator has also indicated that trustees should monitor corporate activity of the sponsor much more closely. If the trustees become aware of a decision by the employer to cease trading in the UK, for example, and the employer fails to report this to the Regulator, the trustees will be under a duty to report this failure as a breach of law (see briefing note on reporting breaches of the law.)

Appendix - Draft list of notifiable events