A guide for trustees of DC occupational pension schemes
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This guidance is designed to complement Code of practice 05: Reporting late payment of contributions to occupational pension schemes and should be read in conjunction with that code. It provides further practical guidance on some of the matters dealt with in the code, such as:
- the monitoring of contributions, and
- example processes for the recovery of outstanding contributions.
Each section of the guidance is referenced and linked to the appropriate code paragraph.
Guidance for specific paragraphs of the code
Code paragraphs 29 to 35 (about monitoring the payment of contributions)
When setting up the scheme, trustees will have discussed and agreed with the employer what level of contributions fall to be paid under the payment schedule. The trustees will therefore know what contributions they can expect to receive when each payroll is run by the employer.
Trustees should have a monitoring process in place to identify whether the contributions that fall to be paid under the payment schedule are paid in full and on time.
It is for the trustees to decide what process to put in place. However, it should be fit for the purpose of identifying payment failures so that the trustees can fulfil their legal duty to report material payment failures to the regulator and to members. Ideally the process and policies that the trustees will adopt for monitoring will be documented in writing.
The process used need not require the checking of every contribution received. It may be a risk-based process, allowing the trustees to identify situations which present a higher risk of material payment failures occurring that require a trustees’ intervention. The process needs to enable the trustees to comply with their reporting duties, but the regulator recognises that it must be commercially viable for the trustees and proportionate so that it is in the interests of the scheme membership as a whole.
Where a higher risk situation occurs, the trustees’ processes should enable them to check the accuracy of the contribution due. This could involve checking the calculation of a contribution which is expressed as a percentage of pensionable pay in the payment schedule.
To assist trustees in establishing a risk-based process, the regulator believes the type of situation or characteristic that may indicate higher risk includes:
- employers who have demonstrated a past history of errors or repeated late or underpayment of contributions
- employers who use manual payroll processes or a payroll provider that has supplied inaccurate pension contributions or pensionable pay data in the past
- employers who provide manual payment information to the trustees, or who have not provided accurate and timely payment information in the past, and
- unexpected fluctuations in the level of contribution where the trustees would normally expect contribution levels to be consistent, for example where the trustees have not previously seen fluctuating contributions from the employer and contributions received suddenly drop without warning. If the trustees are used to seeing fluctuating contributions across pay periods (for example because they are aware that workers have fluctuating levels of pensionable pay) regular changes to contributions may not give the trustees any cause for concern.
Where a higher risk situation is identified trustees should carry out checks to ascertain whether contributions are being paid in accordance with the payment schedule. The type of checking required will depend on the risk identified and the circumstances of the case but appropriate checks may range from random contribution sampling to a full audit of contributions.
For example, an employer has provided late, manual, payment information to the trustees multiple times in a year. The trustees undertake an initial sampling of contributions to establish whether payment failure have occurred and this indicates the likelihood of systemic failure. The trustees therefore decide to carry out a full analysis of all contributions received in order to be able to understand the extent of the problem before being able to seek to resolve the payment issues.
Where only lower risk situations are identified, the trustees may simply decide to carry out occasional spot checks of the contributions received from employers. This will allow them, for example, to satisfy themselves that the basis on which contributions are being paid aligns with the payment schedule. It will also help to assure the trustees that they have set their risk indicators correctly and that their risk-based monitoring process is working effectively.
There is no need for trustees to systematically duplicate the contribution calculation process undertaken by the employer’s payroll system. However, they should carry out periodic checks across employers to ensure that the percentages used by payroll in the calculation of contributions are consistent with those set out in the payment schedule. This will help trustees ensure that their control framework is working and their monitoring processes are able to spot where obvious anomalies exist in the pensionable pay information provided by the employer.
The regulator accepts that a monitoring process based on information provided by the employer may not be able to confirm deliberate underpayment or non-payment, or fraudulent behaviour by the employer (as the employer may try to manipulate payment information to disguise their actions). But it should be able to detect situations where fraud may be more likely to occur and where additional checks may be appropriate.
To be able to monitor contributions, the trustees may from time to time require payment information from the employer including pensionable pay details where contributions are expressed as a percentage of pay. How this is provided by the employer should be established at the set up of the scheme. Where payment information is not provided regularly by the employer and it is necessary to carry out risk-based monitoring, the trustees should request it from the employer. If the employer refuses to provide it, then the trustees may report this to the regulator. The trustees may accept the payment information provided by the employer at face value unless they have reason to believe it to be incorrect.
The trustees are not expected to carry out detailed examinations of pay data, such as to examine whether the elements of pay which are pensionable under the scheme rules are actually being taken into account in the calculation of contributions. However, the trustees’ processes should be able to identify when clear errors or omissions arise, for example, if payments were to suddenly fall by a certain percentage or more from period to period.
A suitable monitoring process should be established for all schemes regardless of whether the scheme is being used by an employer for automatic enrolment purposes after their staging date.
The regulator recognises that older legacy schemes may not currently have a suitable process in place and it may take time for trustees to establish one. When considering a risk-based process for this type of arrangement the recent history of payment failures by employers using the legacy schemes may be a factor to be taken into account.
Code paragraphs 36 to 37 (about taking action to resolve overdue contributions)
Where there is a payment failure, the regulator considers that trustees should attempt to contact the employer to resolve the overdue contributions. The regulator considers that trustees should make at least three attempts to contact the employer within 90 days of the due date having passed without full payment of the contribution. Trustees should, in making contact, alert the employer to the failure, request payment of any outstanding amounts and seek an explanation of the cause and circumstances of the payment failure.
The regulator believes that telephone contact is the best method for encouraging employers to comply and therefore recommends that at least one of the three contact attempts should be by phone. However, it is for the trustees to decide the most effective way to resolve payment failures and how contact should be made, taking into account their own circumstances as well as those of their employers. The regulator acknowledges that telephone contact is not practicable for all schemes or in all circumstances.
Trustees should record the communication attempts made to contact the employer and to record the cause and circumstances of the payment failure where this can be established. Recording this information will help to evidence effective monitoring by the trustees.