Consultation outcome

Government response: Technical amendments to the Pension Protection Fund and Fraud Compensation Fund Regulations

Updated 7 March 2023

Introduction

1. This is the Government response to the public consultation conducted by the Department for Work and Pensions on “Technical amendments to the Pension Protection Fund and Fraud Compensation Fund Regulations”, which ran from 27 July to 9 September 2022. The full consultation document can be viewed at:

https://www.gov.uk/government/consultations/technical-amendments-to-the-pension-protection-fund-and-fraud-compensation-fund-regulations

2. The purpose of the consultation was to seek views on two technical amendments to the Fraud Compensation Fund (FCF) and Pension Protection Fund (PPF) regulations. The first of these amendments corrects an anomaly whereby PPF compensation is stopped for child dependants of PPF members if they take a gap year. The second will allow the FCF to make interim payments to allow schemes with insufficient assets to progress an application.

3. This document provides a summary of the comments received to the consultation from respondents and outlines the Government’s position in response. It confirms that, following consideration of these comments, the Government will proceed with the two regulatory amendments that were consulted on, having made one minor change to their wording in relation to the FCF amendment.

4. During the consultation, the Government invited written responses from interested industry representatives on both amendments. The Government also hosted a roundtable supported by its Arm’s Length Bodies the PPF, the FCF, The Pensions Regulator and The Pensions Ombudsman, inviting independent trustees to comment on the amendment to the FCF.

5. Annex A lists the six respondents to the consultation, and the Government is grateful to them for providing their comments and advice on the proposals.

6. Accordingly, The Occupational Pension Schemes (Pension Protection Fund (Compensation) and Fraud Compensation Payments) (Amendment) Regulations 2023, a copy of which is at Annex B, have been made and laid in both Houses of Parliament. A commentary of the regulations is at paragraphs 17-20 below.

Background

7. The PPF was established by the Pensions Act 2004 to protect members of eligible defined benefit occupational pension schemes (and the defined benefit element of hybrid schemes) when the scheme’s sponsoring employer became insolvent on or after 6 April 2005 and there are insufficient assets in the scheme to pay benefits at PPF compensation levels. The Board of the PPF (the Board) manages the FCF.

Fraud Compensation Fund Interim Payments

8. The FCF provides compensation to eligible defined benefit and defined contribution occupational pension schemes where there has been a scheme asset reduction attributable to an offence involving dishonesty and where the scheme’s sponsoring employer has become insolvent.

9. Historically, the number and size of the claims on the FCF has been low. In November 2020, the High Court, in The Board of the PPF v Dalriada Trustees Ltd clarified that pension liberation schemes, if they satisfied specified criteria, were eligible to make a claim for FCF compensation.^{[footnote 1]} As of 31 March 2022, the PPF are aware of around 130 claims worth a total of £429 million facing the FCF. A Government loan to be repaid via an increase in the Fraud Compensation Levy charged on eligible schemes will enable the FCF to meet these claims, where successful.

10. The consultation document explained that around 70-85 per cent of these potentially eligible schemes have exhausted most or all their assets. This has occurred either as a direct result of an act of dishonesty, or from the cost of trustees investigating dishonesty. Schemes with exhausted assets pose significant challenges for trustees in making and progressing an FCF application, causing potentially successful claims to stall, increasing the overall claim and prolonging uncertainty for victims of pension scams.

11. To progress the claims of potentially eligible schemes with exhausted assets, interim funding is required to cover costs such as trustee, legal and accounting fees which are incurred as part of the FCF application. This funding is needed to cover the costs of investigating potential dishonesty, gathering and supplying evidence to the Board and making recoveries of value.

12. Where the scheme has insufficient assets, the Board can make interim payments to eligible schemes only in relation to prescribed liabilities. These liabilities currently relate to the payment of pensions, money purchase liabilities or terminal illness lump sums, and not for any other reason.

13. An amendment to the Occupational Pension Schemes (Fraud Compensation Payments and Miscellaneous Amendments) Regulations 2005 is required to insert an additional prescribed liability relating to a scheme’s application costs.^{[footnote 2]} This will enable the FCF’s application process to assess the financial situation of the pension liberation schemes which are now potentially eligible for its compensation.

14. Not providing interim funding to these schemes in relation to an FCF application would prevent trustees of potentially eligible schemes from accessing compensation for their members who have been victims of pension scams. This provision represents a proportionate and timely means through which to provide interim funding to these schemes where other forms of redress have been pursued.

Pension Protection Fund Child Dependants

15. Under the Pension Protection Fund (Compensation) Regulations 2005 (the compensation regulations), a child dependant who has a gap between qualifying courses of more than one year loses their entitlement to PPF survivors’ compensation which would otherwise be payable until the age of 23.^{[footnote 3]} This has the effect of excluding many children who take a “gap year” (usually between school and university) and is inconsistent with the Financial Assistance Scheme provisions for surviving child dependants.

16. It was not the policy intention to exclude children who take a gap year from receiving survivors’ compensation and an amendment is required to the compensation regulations to correct this anomaly so that payment may be made to a surviving child dependant from the start date of a further qualifying course, provided that that course begins before the child reaches the age of 23.

The Amendment Regulations

Regulations 1 and 2 – citation and commencement

17. Regulation 1 is a general regulation which gives the title of the regulations and specifies the date on which the regulations come into force. All parts of the regulations will come into force on 6 April 2023.

18. Regulation 2 specifies that the regulations will extend to England and Wales and Scotland.

Regulation 3 – amendment of PPF child dependants regulations

19. Regulation 3 amends the Pension Protection Fund (Compensation) Regulations 2005 to remove the requirement for a new course to start within one year of the end of the previous course, leaving only the requirement that the new course starts before the child reaches the age of 23.^{[footnote 4]}

Regulation 4 – amendment of FCF interim payments regulations

20. This regulation amends regulation 8(1)(b) of the Occupational Pension Schemes (Fraud Compensation Payments and Miscellaneous Amendments) Regulations 2005.^{[footnote 5]} The regulation inserts a new prescribed liability that the Board can make an interim payment for where eligible schemes have exhausted their assets and are unable to meet this liability. This new prescribed liability consists of “costs, expenses and liabilities that arise as a consequence of the application.” This liability may relate to a scheme’s trustee, legal and accounting fees that are required as part of the FCF application process.

Summary of the consultation responses received

Amendment of FCF interim payments regulations

21. The Government sought comments on the proposal set out in the consultation document and asked three questions:

• Question 1 – Do the draft regulations achieve the stated policy intent?

• Question 2 – Do you foresee the draft regulations placing any new regulatory burden or costs on trustees or managers of schemes. If yes, please provide details.

• Question 3 – Do you foresee any unintended consequences with the draft regulations? If yes, please provide details.

22. A total of five written responses to the consultation were received with one organisation (Independent Trustee Services Ltd.) providing only an oral response to these questions at an informal roundtable discussion hosted by DWP during the duration of the formal consultation. The most common themes that emerged in the responses to Question 1 were as follows:

• All six respondents agreed that the draft regulations meet the stated policy intent and welcomed the amendment that will support schemes with exhausted assets throughout the application process.
• Four respondents raised a concern over the Board of the Pension Protection Fund’s application of terms and conditions to interim payments, particularly in relation to the repayment of interim payments.
• Three respondents supported the amendment but raised a concern that the regulations would not allow interim payments to cover costs incurred in the pre-application period.
• One respondent raised concern that the FCF might make interim payments to schemes which later become, or are found to be, ineligible for FCF compensation. With no existing assets in the scheme or compensation due, there was concern that in these cases there would be no way for the FCF to recover their costs, resulting in an increase to the quantum of claims on the FCF.
• One respondent raised concern over what would occur should the quantum of interim payments amount to a sum greater than the overall claim.
• One respondent suggested that the drafting of the FCF amendment was too narrow and suggested alternative wording.
• One respondent raised concerns over the uncertainty of costs that the FCF compensates for and suggested that business-as-usual and wind-up costs should also be compensated by the FCF.
• One respondent questioned the requirement for trustees to exhaust all avenues for recovery before the claim can progress to settlement and suggested that the FCF assume some responsibility for making recoveries on behalf of schemes.
• One respondent suggested the need for a fundamental reform of the FCF and a fairer approach to charging the Fraud Compensation Levy (FCL).
• One respondent suggested that contract-based schemes should assume a greater proportion of paying the FCL.
• One respondent suggested that other avenues for recovery, such as the Financial Services Compensation Scheme (FSCS) or requiring regulated financial advisers to pay the FCL, should be pursued.

A more detailed summary of the responses is provided below.

23. All six respondents agreed that the regulations met the stated policy intent and welcomed efforts to remove the barrier currently preventing potentially eligible schemes from progressing an application. The Government recognises the support for the policy intent across the pensions industry, and it is clear from the responses received that the draft amendment is considered a step towards meeting that intent. Since all respondents agreed that the policy intent was met, the following analysis draws out the differences in the extent to which responses indicated that the policy met its intent. It also addresses respondents’ wider concerns about the FCF compensation system.

24. Four responses highlighted concerns over the application of terms and conditions to interim payments, with the possibility of repayment presenting a particular issue. The scenario envisaged by these concerns involves a scheme becoming or turning out to be ineligible for compensation from the FCF after an interim payment has been made. This would mean that the value of the interim payments could not be taken off the eventual settlement sum as it would usually. Similarly, one respondent was concerned about what would happen if the value of interim payments made was greater than the claim ultimately settled on the FCF, meaning that the value of interim payments could not be taken off the value of the settled claim.

25. The FCF was always intended to operate with a degree of autonomy. Following consultation with the FCF, the Government recognises that, whilst they reserve the right to request repayment of interim payments, there are safeguards in place to make this situation unlikely in instances where trustees have acted in good faith. The FCF have clarified that they intend to release interim payments to schemes gradually. Moreover, interim payments will only be made to schemes which have already satisfied the statutory ‘dishonesty test’ which applies in relation to the interim payments, that is, where the Board has decided that there are, or may be, reasonable grounds for believing that there has been a reduction in the scheme’s assets attributable to dishonesty. As this is the key substantive condition for FCF eligibility, it is unlikely that any scheme which satisfies that condition and therefore receives interim payments will ultimately be found ineligible for compensation.

26. Three respondents supported the amendment but raised concerns that the regulations might not allow interim payments to cover a range of costs incurred in the pre-application period. They suggested that interim payments be extended to cover these pre-application costs. One respondent suggested that the requirement that schemes prove the insolvency of their employer, the cause of some of these costs, be disapplied.

27. The Government acknowledges the difficulties schemes with insufficient assets face in the pre-application period. However, the insolvency requirement remains an important safeguard for the FCF. As the FCF is a fund of last resort, it is right that proof be obtained that the employer is not capable of paying its pension liabilities before making an application for compensation. Disapplying the insolvency requirement would take the FCF too far from its stated remit, weaken the principle of employer responsibility and ultimately place a greater burden on levy payers.

28. While the legislation is owned by the Department for Work and Pensions, decisions about implementation will be the responsibility of the Board in its management of the FCF. Specifically, the way in which the interim payments are facilitated by these amendments at an operational level will be decided upon on a case-by-case basis by the FCF. The operational effectiveness of the draft amendments in facilitating the applications of potentially eligible schemes will continue to be monitored after they are implemented.

29. One respondent raised concerns that interim payments might increase the quantum of claims on the FCF. There was a concern that, if interim payments were made to a scheme which became or was found to be ineligible for FCF compensation, then the FCF would not be able to recover the cost of those payments from the compensation as intended in typical cases, resulting in a net loss to the FCF.

30. As discussed in paragraph 25 above, the Government, in consultation with the FCF understands that it is unlikely that interim payments will be made to ineligible schemes due to the operational safeguards put in place by the FCF.

31. One respondent suggested that the wording of the FCF amendment was too narrow and would introduce difficulties in interpretation. They suggested two changes to the wording of the regulation, of which we have taken forward the first:

• including the word “expenses” in the new prescribed liability and
• changing the wording so that costs and liabilities “attributable to” an application, rather than “as a consequence” of an application, were covered

32. The Government considered the first suggestion and expanded the drafting of the FCF amendment to allow interim payments to be made to cover “costs, expenses and liabilities arising as a consequence of an application” (change in bold). This change broadens the categories for which interim payments can be made, to take into account ongoing expenses as well as one-time costs. It also brings the wording of the instrument more closely in line with the phrasing used to describe similar costs in the Dalriada judgment, in which investigating fraud is repeatedly said to incur “costs, expenses and liabilities” for a scheme. The government is not persuaded of the necessity of the second suggested change and believes that the original wording of the amendment, which stipulates that the new prescribed liability will cover costs arising “as a consequence” of an application, is broad enough to meet the policy objective.

33. One respondent mentioned that there was confusion about the purpose of compensation from the FCF, going on to suggest that the fund could be used to cover schemes’ ‘business as usual’ costs or their winding up costs.

34. Although this concern does not have any bearing on the draft regulations, the Government and the provisions in the Pensions Act 2004 are clear that the FCF was never intended to pay such costs and is only meant to provide schemes with funding to match the loss incurred as a result of dishonesty. Making changes to this principle would take the FCF too far away from its stated remit. Paying business as usual costs or winding up costs remains the responsibility of the scheme and its trustees and should continue to be funded using scheme assets.

35. One respondent questioned the requirement for trustees to pursue recoveries as far as possible before reaching a settlement, as this can be a long and expensive process and may not represent value for money for scheme members.

36. The Government recognises that in cases of pension liberation fraud this requirement can cause delays, as recoveries are difficult to make in these cases. However, the requirement that schemes should make effort to recover monies before compensation can be made remains an important way of ensuring that levy-payers are not paying for compensation when recoveries could reasonably be made from other sources. The FCF encourages trustees to consult with them as early as possible about recoveries so that the FCF can, where appropriate, encourage efficiencies and support schemes. This concern does not have a direct impact on the draft regulations.

37. Three respondents made separate comments about the funding structure of the FCF, raising concerns about which schemes pay the Fraud Compensation Levy (FCL). One respondent suggested that there was a need for wide-ranging reform of the FCF and a fairer approach to charging the FCL, going on to suggest that banding the rate of levy by scheme size would prevent larger schemes with small pots from being penalized. One respondent suggested that contract-based pension schemes should assume some of the burden of the FCL due to their perceived responsibility for some of the pension transfers into pension ‘liberation’ schemes. One respondent suggested that extending the levy base to regulated financial advisers should be considered.

38. The Government remains committed to the original policy intent of the pension protection and fraud compensation regimes which are working broadly as intended and continues to monitor the operations of the FCF including the levy. These concerns do not have a direct impact on the draft regulations, as these regulations do not raise the FCL.

39. One respondent suggested that other vehicles for compensation, such as the Financial Services Compensation Scheme (FSCS) be explored for use in pension liberation cases.

40. The Government is aware that while some victims of pension liberation schemes may be eligible for FSCS compensation, the judgment in Dalriada made it clear that the schemes themselves were eligible for funding from the FCF. To ensure compliance with this judgment, the draft amendments will facilitate these applications. Furthermore, the FSCS is a compensator of individuals while the FCF is a compensator of last resort for schemes. Work is currently being undertaken to look at the interaction between the FSCS and FCF in a collaborative manner between the two bodies with support from the Government.

41. In summary, the Government notes the broad support for the regulations expressed in the responses received. It acknowledges the concerns raised about the operational implementation of interim payments, but ultimately it believes that new regulations will be effective in facilitating potentially eligible schemes to progress claims.

42. It should also be noted that Parliament intended the FCF to operate with a large measure of independence. Therefore, the way interim payments are implemented at an operational level will be ultimately decided upon on a case-by-case basis by the Board, in managing the FCF. The operational effectiveness of the draft amendments in facilitating the applications of potentially eligible schemes will continue to be monitored after they are implemented, and the FCF have agreed to update the Government on this as necessary.

43. Regarding Questions 2 and 3, respondents primarily provided written responses.

• Two respondents noted that trustees may incur negligible familiarisation and other additional costs throughout the application.
• One respondent observed that the drafting of the regulations could generate interpretative difficulties which may give rise to costs.
• No respondents identified any unintended consequences with the draft regulations.

44. The Government has made a minor change to the wording of the amendment, as discussed in paragraph 32 above. The description of the prescribed liabilities is intended to be broad enough to capture the costs involved in making an FCF application, and the new drafting of the amendment is a clear reflection of that intent.

45. Respondents may wish to note that the PPF have a range of information and advice available to schemes applying to the FCF. This can be found here: Welcome to the Fraud Compensation Fund.

Amendment of PPF child dependants regulations

46. The Government sought comments on this proposal set out in the consultation document and asked two questions:

• Question 1 – Do the regulations meet the stated policy intent?

• Question 2 – Are you aware of any unintended consequences arising from the regulations? If yes, please provide details.

47. All those who responded agreed that the regulations met the stated policy intent, and none identified any unintended consequences.

48. One respondent spotted a drafting error in that a reference to the 2015 regulations should refer to the 2005 regulations and one respondent suggested that a fundamental reform of the PPF and associated levies was required, rather than piecemeal changes.

49. The drafting error has been corrected. Reform of the PPF and associated levies does not have any bearing on the draft regulations.

Government response

50. Having considered the responses received, the Government made one change to the wording of the amendment, adding “expenses” to the new liability prescribed by the FCF provisions. After making this change, the Government has decided to proceed with the proposal set out in the consultation document.

51. Following legal checks on the statutory instrument, the title of the regulations was amended to The Occupational Pension Schemes (Pension Protection Fund (Compensation) and Fraud Compensation Payments) (Amendment) Regulations 2023. The order of the regulations was changed after consultation, such that the provisions for the PPF are laid out in regulation 3 and the provisions for the FCF are laid out in regulation 4, as described in the commentary at paragraphs 17-20 above.

Conclusion

52. The Government would like to thank all the respondents who have offered their views and advice in response to this consultation exercise. The Occupational Pension Schemes (Pension Protection Fund (Compensation) and Fraud Compensation Payments) (Amendment) Regulations 2023 have been made and laid before both Houses of Parliament.

These regulations are available on the UK Legislation website:

https://www.legislation.gov.uk/uksi/2023/265/contents/made

This document is available on the GOV.UK website

https://www.gov.uk/government/consultations/technical-amendments-to-the-pension-protection-fund-and-fraud-compensation-fund-regulations

Annex A: list of those who responded to this consultation

Dalriada Trustees Ltd

Pi Consulting (Trustee Services) Ltd

Independent Trustee Services Ltd

Mercer

The Pensions and Lifetime Savings Association (PLSA)

The Association of Pension Lawyers (APL)

Annex B: The Occupational Pension Schemes (Pension Protection Fund (Compensation) and Fraud Compensation Payments) (Amendment) Regulations 2023

This document is available on the GOV.UK website

Technical amendments to the Pension Protection Fund and Fraud Compensation Fund Regulations

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1. [2020] EWHC 2960 (Ch) Case No: PE-2019-000016. ↩

2. SI 2005/2184 ↩

3. SI 2005/670 ↩

4. SI 2005/670 ↩

5. SI 2005/2184 ↩