Certain people are required to report breaches of the law to us where they have a reasonable cause to believe that:
- a legal duty which is relevant to the administration of a scheme has not been, or is not being, complied with
- the failure to comply is likely to be of material significance to us in the exercise of any of our functions
See who must report.
The purpose of this guidance is to give examples of breaches relating to pension schemes and to provide you with a framework to make decisions to report to us, based on the significance of a breach.
If the breach relates to a late payment of contributions, see also reporting payment failures.
Published: 28 March 2024
Traffic light framework
To assess whether a breach is likely to be materially significant, you can follow our traffic light framework to identify breaches that must be reported.
- Red breach situations must be reported as they are always of material significance to us.
- Amber breach situations may need to be reported as they are less clear cut and must be considered in the context of the breach as to whether or not they are of material significance.
- Green breach situations do not have to be reported if they are not of material significance.
If you identify a possible breach of the law you should take the following steps.
- Check what the law requires, seeking legal advice where appropriate.
- Check the facts of the potential breach with appropriate parties, ie the governing body, administrator and advisers to the scheme.
- If there is reasonable cause to believe that a breach has occurred you should consider the cause, effect and wider implications to help you decide whether it is a red, amber or green breach.
- Report the breach to us if necessary.
- Document details of the breach.
- Where remedial activities for the breach are ongoing, ensure you monitor these closely and consider further reports to us if mitigating actions prove ineffective.
The following sets out examples of red, amber and green breaches to help you to decide whether to report a breach of law to us. However, the list is not exhaustive and is illustrative only. You should also refer to relevant legislation and our code of practice as part of your decision-making process.
Example red breaches
A breach is reportable as a red breach where one or more of the following applies:
- it was caused by dishonesty, negligence, reckless behaviour, poor scheme governance, ineffective controls resulting in deficient administration, or slow or inappropriate decision-making practices, poor advice, or intentionally breaking the law
- its effect is significant
- inadequate steps are being taken to put matters right
- it has wider implications
The information below contains examples of red breaches.
Misuse/Dishonesty
Example 1
A fund manager receives an instruction to transfer documents of title or sale proceeds to a destination that does not appear to be another fund manager or approved pension scheme without a satisfactory explanation.
Reason: The cause may be dishonesty. The effect is to remove assets from the scheme.
Example 2
The governing body authorises loans from the scheme to the employer or an associated company, no matter how short term that arrangement is.
Reason: The cause is likely to be either a deliberate decision by the governing body to flout the law or, at best, a failure to appreciate that such a loan is illegal. The effect is a weakening of member security.
Example 3
A persistent or significant departure from the scheme's statement of investment principles, for example to allow self-investment in the employer (or associated companies) or to allow a departure from agreed asset class ranges.
Reason: The cause may be dishonesty. It may have a significant effect on the security of members' benefits in a defined benefit (DB) scheme or on members' expectations in a defined contribution (DC) scheme.
Example 4
A trustee acting while disqualified.
Reason: The cause may be dishonesty. The effect is that a person not considered fit and proper is making decisions for the scheme.
Investment governance
Example 1
The governing body of a DB scheme fails to review their investment policy when there are significant changes to the scheme, for example when there are no longer any active members or the scheme begins winding up.
Reason: The cause may be a lack of understanding on behalf of the governing body of the importance of investment policy. The effect may be a weakening of the security for members' benefits.
Example 2
The governing body prepares a statement of investment principles without consulting the employer or seeking the required professional advice.
Reason: The cause may be a lack of understanding of these important requirements. The effect is that the employer, who is the ultimate sponsor of the scheme, is being denied the right to give their views on such a vital subject. The absence of required advice may result in the statement being unsuitable.
Governance and administration
Example 1
Persistent failure to obtain auditors' statements on contributions or audited accounts within the required seven-month period.
Reason: The cause may be a failure of the governing body to maintain accurate records or as a result of inadequate administration systems. The wider implications are that further administrative breaches are likely in the future and members may be receiving incorrect benefits.
Example 2
Widespread and persistent misallocation of member contributions for schemes providing DC benefits, where the governing body or administrator is aware of the issue and has failed to resolve it promptly.
Reason: The cause may be poor governance and controls. The effect is that many members' benefits are affected. Persistent failures may also indicate deliberate neglect.
Example 3
Widespread and recurring administrative delays and errors, such as delays in providing transfer values or benefit statements and any miscalculation of benefit values within these.
Reason: The cause is likely to be inadequate governance, in particular a failure to monitor service level agreements with the administrator. The effect is that members are experiencing delays and may not receive the correct benefits. Wider implications could be, in the case of a third-party administrator, that the issue is affecting other schemes.
Example 4
The employer stops paying contributions and is no longer corresponding with the governing body’s request for information.
Reason: The cause may be dishonesty or the result of a business failure. The effect is that members’ benefits are affected.
Reporting
Example 1
The governing body fails to report on the progress of winding up the scheme, where this has exceeded the two-year statutory timeframe.
Reason: The cause may be the governing body lacks the appropriate knowledge and understanding to carry out their duties. The effect is that the governing body is not fulfilling an important regulatory responsibility to keep us informed and the extended period of winding up may be detrimental to the scheme members.
Example 2
The governing body or employer of a DB scheme fails to submit a report when a notifiable event has occurred.
Reason: The cause may be dishonesty or a lack of understanding on behalf of the governing body. The effect is that we do not receive an important early warning of a potential funding problem and there may be a weakening of the security for members' benefits.
Example amber breaches
Amber breaches do not fall obviously into either the red or green classification.
The decision whether or not to report will require a balanced judgement based on the cause, effect and wider implications of the breach.
Previous breaches and mitigating actions may be relevant in deciding whether an amber breach is of material significance, as these may indicate that the governing body lacks adequate oversight or controls.
Where you have any doubt about the material significance of the matter, you should submit a breach of law report to us.
Examples of amber breaches
Example 1
Multiple green breaches in a short period of time.
Reasons that this may be a red breach:
- breaches caused by a lack of internal controls being put in place by the governing body or service provider
- significant delays are expected before the problems are resolved
- minimal efforts have been taken to resolve the problems
- the governing body or service provider has not demonstrated the necessary knowledge or skills, and this may affect other schemes they are involved with
Reasons that this may be a green breach:
- breaches stem from a single cause that is beyond the governing body’s control, such as teething problems with a new system or the short-term absence of a critical member of staff
- effects of the breaches are likely to be short-lived
- responsible parties have acted to resolve the issue and prevent it recurring
Example 2
The scheme auditor discovers that benefits for some members have been miscalculated.
Reasons that this may be a red breach:
- the systems and monitoring procedures are inadequate and this may have wider implications
- many members have been affected or this has been an issue for several years
- the governing body has not acted effectively and they have not communicated with members
Reasons that this may be a green breach:
- a small number of members were affected or the issue has only arisen recently
- the governing body has acted to identify the extent of the issue, resolved it and communicated this clearly to members
Example green breaches
A breach is likely to be classified as a green breach where all of the following apply:
- it was not caused by dishonesty, poor scheme governance, poor advice or by a deliberate contravention of the law
- its effect is not significant
- proper steps are being taken to put matters right
- it does not have wider implications
The information below contains examples of green breaches.
Governance and administration
Example 1
The governing body obtains the auditor's statement on contributions or audited accounts two months after the seven-month deadline due to a change in adviser.
Reason: The cause is outside of the governing body’s control and they have reacted appropriately by correcting matters in a timely manner. The effect of the breach is not serious and was considered an isolated incident.
Example 2
The governing body fails to provide a small number of members with information about their benefits within the statutory timeframe due to system failure. However, they are able to provide the information a month later and introduce measures to prevent the issue recurring.
Reason: The cause is outside of the governing body’s control and they have reacted appropriately by correcting matters in a timely manner. The breach affected a small number of members and appropriate remedies were introduced.
Example 3
The governing body incorrectly records the effective date of a professional adviser’s appointment to their scheme within documentation but has since identified and corrected the error.
Reason: The cause seems to be a human error and the governing body have reacted appropriately. The effects of the breach were not serious and there are no wider implications.
Example 4
The governing body identifies employer contributions to the scheme are overdue. They successfully implement a payment arrangement to recover contributions from the employer.
Reason: The cause may be an administration error or temporary cash flow issue. The effect on members’ benefits are short term as arrangements to recover overdue contributions are being met.
Reporting
Example
The governing body chooses not to issue statements of entitlement to members when the scheme begins winding up as the scheme actuary advised it would be unsafe to do so until the scheme's funding level had been confirmed. The governing body continues to resolve outstanding issues, including confirming the scheme's assets and liabilities, and keeps members informed.
Reason: The cause is the governing body’s decision to avoid providing incorrect information to members while they acted to resolve the matter. The effect is that more relevant and useful information will be issued in due course.