Regulatory activity

Broadly, our powers can be divided into the following types:

• Preventive - used where there is an immediate or chronic risk to members' benefits.
• Detective - used where we need to investigate the cause or consequences of a particular problem.
• Educative - used where it is clear that the trustees or others do not have the necessary knowledge and understanding to carry out their duties.
• Remedial - used where benefits have been damaged and we want to reinstate them.
• Penalties - used to emphasise the importance and value of compliance in protecting members' benefits, and to deter future non-compliance.

Not all powers can be used in all situations - many are quite specific to an event or a set of circumstances. Most are designed to achieve a particular type of outcome, while others are more flexible and enable The Pensions Regulator to tailor their effect to suit the situation and to achieve the desired outcome.

The Pensions Regulator's staff have the discretion to use some of the powers - for example, improvement notices - but the majority can be used only with the consent of the regulator's determinations panel.

The Pensions Act 2004 provides The Pensions Regulator with a wide range of powers. As a proportionate, transparent, accountable and risk-based regulator, how do we choose the right regulatory approach for any given situation?

The Pensions Regulator has been given powers in legislation so that it can achieve its statutory objectives.

The board of The Pensions Regulator has set a number of high-level principles that guide its day-to-day regulatory work. These principles are that we should:

• take a proportionate approach to risk;
• use the approach that is most likely to improve the overall administration of schemes and protection of benefits, commensurate with achieving the desired outcome and managing the risks. We will always, as a high priority, offer advice, information, education to trustees, employers and scheme actuaries to help them to achieve sustained improvement in their performance;
• act in accordance with the principles of good regulation and the protection of human rights; and
• focus clearly on outcome to be achieved rather than on process.

As well as The Pensions Regulator, other parties have a role to play in protecting members' benefits - it is the pension scheme trustees' role to provide the first layer of protection, then advisers, providers and employers through to other regulators such as the Financial Services Authority and finally, when all other layers of protection have failed, the Pension Protection Fund or other compensation funds. See the 'regulatory ripple' diagram showing the layers of protection.

The Pensions Regulator uses its powers and influence proactively, to enable each of the parties to play an effective part in protecting benefits, and to ensure that they do all work towards the common objective.

What we need to consider

When we identify a possible problem with a scheme, we consider a series of questions.

• Does this situation indicate that there is a serious risk to members' benefits? If 'Yes', we need to take immediate action to safeguard those benefits. This sort of 'emergency' action is relatively rare but recognising the need for it, and taking the right steps, is vital.
• Whether or not emergency action is required, the next question is - what caused the problem? There is a whole spectrum of possibilities here, ranging from an administrative failure caused by lack of knowledge, to a more sinister explanation such as fraud. And we also ask - who caused the problem?
• In general terms, we will want to make sure that members' benefits are not depleted as a result of the problem, so we ask ourselves how we can best secure the remedy. 
• We also want to ensure that the cause of the problem is eliminated, so that the situation won't continue or recur later. We look to match our approach to the nature and source of the cause. The Pensions Regulator actively promotes high standards of administration, and provides practical guidance to trustees and administrators to enable them to achieve these standards. We always look to work with others - trustees, employers, actuaries etc - to improve their knowledge and advise them of their options, before embarking on a formal enforcement route.

We are more likely to use our formal powers in circumstances where, for example, informal means such as education and advice given previously did not result in raised standards, or where the matter was so serious that informal means were not appropriate.

Applying a consistent set of risk-based criteria to the circumstances of individual schemes will enable The Pensions Regulator to target its resources on achieving the best overall outcome for members of work-based pension schemes.

To show how this works in practice, we have set out a regulatory scenario with some practical examples showing the approaches and powers we used to reach our defined outcome. We will add more sceanrios from time to time.

Stage 1

A bank may contact us because they are concerned that a trustee has asked them to transfer a large amount of money from the trustee bank account to a Swiss bank account in the trustee's name. Although they are reluctant to do so, they are unable to refuse as the account is set up in such a way that one trustee's signature is sufficient authority. Here, it is clear that there is an immediate risk to members' benefits and our priority would be to prevent the transfer from occurring.

We would therefore consider using our power under section 15 of the Pensions Act 2004 to apply to a court for an injunction to restrain the trustee from transferring the funds. The fact that only one trustee's signature was required to transfer funds gives us cause for concern that the scheme's internal controls are not effective in protecting the fund and therefore members' benefits. We would, at least, raise this with the trustees, and refer them to The Pensions Regulator's code of practice. We might also decide to investigate further into how well the current trustees were running the scheme and might, for example, request copies of trustee minutes.

This information may indicate that we need to provide some guidance in specific areas, or possibly that the scheme is being so badly run that the appointment of an independent trustee under section 35 of the Act is required.

Stage 2

In example 1, the trustee could be acting with fraudulent intent and, therefore, once we had taken the appropriate immediate action, we would consider using our power under section 33 of the Pensions Act 2004 to prohibit the trustee from acting in respect of that scheme - and probably from any other pension schemes. The trustee's name would be placed on our register of prohibited trustees. However, situations may arise where the cause of the problem is not so clear cut.

For example, we may receive a whistleblowing report from a pension scheme provider that employee and employer contributions to a group personal pension plan have not been received for several months. We would need to carry out an investigation in order to discover why this had occurred. This would include determining whether the employer was in financial difficulty and establishing whether or not employees' contributions had been deducted from their salary. The reason for the breach could simply be down to poor administration by the employer, who may not have even deducted the contributions from salary.

If initial investigation revealed that the breach was caused by poor administration, we would probably have more of an educational role to play, initially, in order to make the employer aware of their responsibilities. In the first instance we would probably direct them to our website, but would provide more information specific to their needs, if required - this could be written information or just talking through a particular issue over the phone.

It may also be appropriate for us to monitor the situation by keeping in regular contact with the employer and constantly ensuring that they are taking the necessary steps to enable the payment of contributions to be made on time.

If, after having been given the opportunity to rectify the breach, the employer has still failed to do so, we may consider issuing an improvement notice using our power under section 13 of the Act to ensure that the breach is rectified.

Alternatively, it may be discovered that the employer is in financial difficulties and has been redirecting contributions into their company bank account. Here, it would probably be appropriate for us to consider taking more punitive action such as prosecuting the employer under section 111A (12) of the Pension Schemes Act 1993 for fraudulently evading payment of employee contributions.

Stage 3

In Example 2, we would want to ensure that any unpaid contributions are paid over to the scheme as soon as possible. If the cause had been due to administrative failure or misunderstanding, the employer should be willing to enter into negotiations with us. We would monitor the situation closely and get regular updates from the employer on progress made until the situation was rectified.

However, in the more serious case of the employer deliberately redirecting the contributions into the company bank account, we may consider using our power under section 17 of the Pensions Act 2004 to apply to the court to recover the unpaid contributions.

Stage 4

In example 3, in the first instance we would provide any guidance we could to ensure that the employer understood exactly what their responsibilities were. We would then aim to ensure that the employer put in place the necessary administrative systems so that the contributions would be paid over on time.

If the employer still failed to rectify the breach, we would consider issuing an improvement notice specifying what actions we required them to take within a certain timeframe. If the employer failed to comply with the actions specified in the improvement notice, we could consider issuing a determination notice for failure to comply which could result in the determination panel deciding to impose a fine on the employer. This action would only be considered as a last resort if the employer appeared to be deliberately obstructive.

We would much rather work with the employer and help them overcome any problems so that the contributions could be paid on time.