The hazards of pension disclosure

by Roderick Ramage, solicitor, www.law-office.co.uk

first published in New Law Journal (newlaw.journal@lexisnexis.co.uk) on 20 January 2006

 


DISCLAIMER

This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.


The hazards of pension disclosure

Roderick Ramage explores the uncertain boundary between a solicitor’s duty of confidentiality and the statutory duty of disclosure to the Pensions Regulator under the Pensions Act 2004

·         moral hazards and notifiable events

·         exception from the duty to report

 

moral hazards and notifiable events

The "moral hazard" provisions of the Pensions Act 2004 are by now well known (for a summary see article) and continue to cause at least as much delay and inconvenience as early commentators had expected in relation to buying, selling and reorganising businesses and companies.  These provisions can pierce the corporate veil by (a) making individuals associated or connected with employers personally liable under a "contribution notice" for the employer's liability for the pension scheme debt and (b) making other companies in the employer's group liable for it under a "financial support direction".

Probably less well known but almost certainly more important are the provisions under s69 of the Pensions Act 2004 requiring reports to be made to the Pensions Regulator (TPR).  Whilst applying to TPR for clearance under the moral hazard provisions is voluntary, the reporting provisions are mandatory, and failure to comply with them can result in "civil penalties" under s10 of the Pension Act 1995 up to £5,000 in the case of individuals and £50,000 in the case of companies.  What must be reported is listed below, paraphrasing reg 2 of the Pensions Regulator (Notifiable Events) Regulations 2005, SI 2005/900.

(1)     The events to be reported by the trustees of an occupational pension scheme are:

(a)     any decision by them resulting or intended to result in any debt to the scheme not being paid in full;

(b)     [changes auditor or actuary – revoked 6 April 2009 by SI 2009/617];

(c)      transfers to or from the scheme of 5% of the scheme assets or (if less) £1,500,000;

(d)     granting benefits on more favourable terms than those provided for by the scheme rules without actuarial advice or additional funding;

(e)     granting benefits for a single member at a cost of more than 5% of the scheme assets or (if less) £1,500,000.

(2)     The events to be reported by the employer are:

(a)     any decision by it resulting or intended to result in a debt to the scheme not being paid in full;

(b)     a decision by it to cease to carry on business in the United Kingdom;

(c)      trading wrongfully (s214 of the Insolvency Act 1986), or when a director knows that there is no reasonable prospect that the company will avoid going into insolvent liquidation (s214(4) of that Act);

(d)     any breach by a bank covenant except than where the bank agrees not to enforce the covenant;

(e)     [change in credit rating – revoked 6 April 2009 by SI 2009/617];

(f)      a decision by a controlling company to relinquish control of the employer company;

(g)     [changes chief executive or financial director – revoked 6 April 2009 by SI 2009/617];

(h)     the conviction of an individual for an offence involving dishonesty, if committed while a director or partner of the employer.

These are "notifiable events" to be reported to TPR by "the appropriate persons", who are the trustees and the employer of a scheme and other persons "of a prescribed description".

 

reporting breaches

Where this becomes of particular interest to solicitors and other professional advisers is in s70 of the 2004 Act.  Under this section, and notwithstanding the normal professional duties of confidentiality (but with an exception in s311), a  professional adviser in relation to a pension scheme must give a written report of the matter to TPR as soon as reasonably practicable after he has reasonable cause to believe that a duty relevant to the administration of the scheme imposed by an enactment or rule of law, has not been or is not being complied with, and the failure is likely to be of material significance to TPR in the exercise of any of its functions.

Under the Pensions Act 1995, whistleblowing duties were imposed on the scheme's actuaries and auditors, but the 2004 Act extends them to all professional advisors, which can include solicitors.  It gets worse (or better if you have a Home Office approach to human rights and professional duties).  By s72 of the 2004 Act, TPR may, by notice in writing, require specified persons, including a professional adviser in relation to a pension scheme, to produce any document or provide any other information, which is of a description specified in the notice and is relevant to the exercise of its functions. 

 

solicitors’ duty of confidentiality

A solicitor’s duty of confidentiality is described in chapter 16 of the Law Society’s Guide to the Professional Conduct of Solicitors.  The introductory note  to that chapter (copied from the online Guide) says the following.

The duty of confidentiality is fundamental to the relationship of solicitor and client. It exists as an obligation both in law, having regard to the nature of the contract of retainer, and as a matter of conduct.  All the information a solicitor discovers about a client in the course of a retainer is confidential; whether the information is also privileged is a separate legal issue.

Para 16.1 3 continues as follows.

The duty of confidentiality applies to information about a client’s affairs irrespective of the source of the information.

Two key aspect of this duty are that the it is sufficient that the information is about the client or his affairs for it to be confidential, even if it would not be regarded as confidential in another context (eg under the tests in Faccenda Chicken Ltd [1986] 1 All ER 617, CA) and that it applies irrespective of the source of the information.

 

exception from the duty to report

The exception in s311 of the 2004 Act is that communications between a professional legal adviser and his client and any other person made in connection with giving legal advice to the client or legal proceedings are treated as “protected items” and are not required to be produced or disclosed or be liable to inspection. 

It is not wholly clear how this interacts with the whistleblowing duty under s70.  Sub-section (3) of s70 says that no duty (in this context a solicitor’s duty of confidentiality) will be broken by anything contained in a report made under this section.  So far so good (to the extent that a s70 report is not a breach of a solicitor’s professional duty, even if it is likely to strain the solicitor/client relationship).  Then, as a separate paragraph in sub-section (3) are the words: “This is subject to section 311 (protected items).”  To what does the “this” refer?  Does it refer to (a) the “reporting requirement” in sub-section (1) or (b) the duty which would otherwise be contravened, with which sub-section (3) is concerned? 

The unadorned “this” appears at first sight to refer to the subject matter of sub-section (3) in which it appears, but, as the application of s311 to sub-section (3) alone  is unintelligible, a purposeful (eg, Litster [1988] 1 All ER 1134, HL) or commercially sensible (eg, Mannai, [1997] All ER 352, HL) construction may mean that it is the reporting requirement that is subject to s311: ie the word “section” may be deemed to be inserted after the “This”.  This appears to be the interpretation of some commentators, such as TPR’s Code of Practice “Reporting Breaches of the law”, Freshfields Bruckhaus Derringer’s briefing note of January 2005 and CMS Cameron McKenna’s Plain English Guide to the PA 2004.

 

an example

Here is an example.  A solicitor with clients who are trustees of a pension scheme becomes aware of the fact that an employer in relation to the scheme has ceased to carry on its business and has deliberately failed report the cessation.  The employer’s failure is a breach which must be reported under s70.  Is the solicitor under a duty to report it?  The answer will depend on the circumstances and could include the following three scenarios (doubtless other will think of more).

1   The information was imparted to the solicitor by the trustees who were seeking advice about their relationship with the employers. The information is part of a communication within s311, so it is protected from disclosure.  On a purposeful construction of s70(3) the solicitor is not under an obligation to report it to TPR under s70.

2   If the solicitor was given the information by a fellow commuter on the train or a garrulous golf partner (or even the scheme’s actuary or auditor), it was not given in a communication between the persons mentioned in s311 or in connection with legal advice.  Therefore it is not a protected item under s311 and the solicitor must report it to TPR.  It is however about a client’s affairs and so is subject to the solicitor’s duty of confidentiality, but, by s70(3), the report to TPR does not contravene that duty.

3   Suppose however the solicitor is involved in a corporate finance transaction in which he is advising, the buyer’s bank.  His client trustees are not involved, but, even though the transaction involves a remote part of the group of companies to which the employer belongs, this information comes to light in the course of disclosures about the wider background.  Disregarding whether he should be advising because of a possible conflict of interest, is this information reportable and is it a “protected item”?  It is reportable and is part of a communication between a solicitor and his client made in connection with the giving of legal advice, even though the information has nothing to do with the advice being given and is not given by his trustee clients or anyone representing them.  It is enough for the duty to report that the solicitor is a professional adviser in relation to the scheme under s70(1)(c).  The information is a protected item under s311 (construed widely) because there is no requirement in that section for the client to be one who is connected to the pension scheme, as employer, trustee or otherwise.  It is irrelevant that the information, being neither about the bank nor its affairs, was not confidential to the solicitor’s client in this transaction.  The conclusion under 1 above applies here too.

Well, who expects legislation to be easy?

 

 

copyright Roderick Ramage

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