Chapter 4 – Fraud Compensation
Entitlement to fraud compensation
Section 182: Cases where fraud compensation payments can be made
659.This section deals with the payment of fraud compensation to occupational pension schemes. It is necessary to make an application for fraud compensation and the requirements to be met by the application will be set out in regulations. Regulations can specify particular schemes and descriptions of schemes which are not entitled to make fraud compensation applications.
660.Compensation will be paid if the value of the assets has been reduced since the ‘relevant date’ and the Board considers that there are reasonable grounds for believing the reduction was attributable to an act or omission constituting an offence prescribed by regulations for the purposes of this section. The relevant date in the case of schemes established under trust is the 6 April 1997 and in other cases a date to be specified by the Secretary of State by order.
661.Compensation will be payable if subsections (2), (3) or (4) apply.
662.Subsection (2) applies where there is a qualifying insolvency event, a binding scheme failure notice (issued under section 122(2)(a)) where a scheme rescue is not possible) and a cessation event has not occurred and is not a possibility in relation to the period set out in paragraph (c). (A cessation event is defined in subsection (9)).
663.Subsection (3) applies where there has been an application or notification under section 129 in respect of an eligible scheme that has not had an insolvency event but where the employer is unlikely to continue as a going concern, and the Board has issued a scheme failure notice, which has become binding.
664.Subsection (4) applies where a scheme is not an eligible scheme for the purposes of Chapter 3 of Part 2 (e.g. where it is a money purchase scheme). An application for fraud compensation can be made to the Board on the basis that the employer is unlikely to continue as a going concern and other requirements are satisfied (these will be set out in regulations). This section will give entitlement to fraud compensation if in response to such an application the Board issues a scheme failure notice under section 183(2) confirming that a scheme rescue is not possible. This notice must become binding.
665.Subsection (6) sets out requirements in relation to the “authorised period” – this is the period during which an application for fraud compensation can be made. An application must be made within twelve months of:
in a case within subsection (2) where the scheme is an eligible scheme (under section 126) the qualifying insolvency event; or
in a case within subsection (2) where the scheme is not an eligible scheme, the issue of a scheme failure notice under section 122(2)(a); or
in a case within subsection (3) the application or notification to the Board under section 129; or
in a case within subsection (4), the time it becomes clear that the employer in relation to a scheme, will not continue as a going concern;
the time when the scheme’s auditor, actuary, trustees or managers first became aware of the fraud event, if this is later.
666.The Board may extend this period if it considers this appropriate. An application cannot be made once the Board has assumed responsibility for the scheme under Chapter 3 of Part 2..
Section 183: Board’s duties in respect of certain applications under section 182
667.This section applies where an application is made by a scheme which is not an eligible scheme for the purposes of Chapter 3 of Part 2 and the employer is not likely to continue as a going concern (and other requirements to be set out in regulations are met).
668.The Board will as soon as reasonably practicable issue a notice that a scheme rescue is not possible or has occurred. Subsection (3) provides that it must as soon as reasonably practicable give a copy to the Regulator, the trustees or managers of the scheme, the person who made the application and the insolvency practitioner (and if there is no practitioner, the employer).
669.Subsection (4) provides that the notice becomes binding once the period for review has expired and any review, reconsideration and reference to the PPF Ombudsman and reference to any appeal against his decision had been disposed of and the notice has not been revoked, varied or substituted.
670.Where a notice becomes binding, a notice to that effect must be given along with a copy of the binding notice to those mentioned in subsection (3). The form and contents of this notice will be set out in regulations.
671.Subsection (7) provides that section 130 (circumstances in which scheme rescue can or cannot be confirmed by the Board) applies for the purposes of this section.
Section 184: Recovery of value
672.Trustees or managers of schemes which apply for fraud compensation are required to attempt to recover the value of the loss due to fraud where the recovery can be made without undue cost or delay.
673.Subsection (2) provides that fraud compensation cannot be made until the Board has set a “settlement date”. This is the date after which further recoveries would be unlikely without undue cost or delay. The Board must consult the trustees or managers before setting the date.
674.Subsections (3) and (4) provide that ‘recovery of value’ refers to payments received by the scheme in respect of the act or omission which resulted in the reduction of the scheme’s assets. This will not include payments from the Board. It is for the Board to decide whether a payment will be classified as a recovery of value.
Section 185: Fraud compensation payments
675.This section sets out the procedures to be followed by the Board when making a fraud compensation payment.
676.Subsection (2) permits the Board to set the terms and conditions of a payment, while subsection (3) states that total payment must not exceed the value of the loss less any recovered funds. The amount of the payment must be determined in accordance with regulations and must take account of any interim payments made (subsection (4)).
677.Subsection (5) requires the Board to give written notice of the payment to be made to the trustees or managers, the applicant (if different), the Regulator, and the insolvency practitioner or employer (if there is no insolvency practitioner).
Section 186: Interim payments
678.This section allows the Board to make interim payments to a scheme where it appears that the conditions in section 182(1) are satisfied and the trustees or managers would not be able to meet liabilities of a prescribed description. No interim payments may be made once a settlement date has been specified.
679.Subsection (2) stipulates that interim payments must not exceed the amounts which will be determined as set out in regulations. Under subsection (3), interim payments can be recovered by the Board if it decides the criteria in section 182(1) have not been met or the amount paid was excessive.
680.Subsection (4) permits the Board to set the terms and conditions of interim payments, including any requirement for repayment.
Section 187: Board’s powers to make fraud compensation transfer payments
681.Where the Board assumes responsibility for a scheme, the Board may make fraud compensation transfer payments to the Pension Protection Fund. This will occur where there had been a reduction in the scheme’s assets after the relevant date (as defined by section 182 (10)) but before the transfer notice was received by the trustees or managers under section 160 (transfer notices), ending the assessment period and confirming that the Board of the Pension Protection Fund will assume responsibility for the scheme, section 182(1)(b) applies and no application had been made for fraud compensation prior to the Board assuming responsibility for the scheme.
682.Under subsections (3) and (4), the Board is required to attempt to recover the value of the loss (‘recovery of value’), where the recovery can be made without undue cost or delay. The trustees’ or managers’ rights of recovery will have been transferred to the Board when it assumed responsibility for the scheme. The transfer payment cannot be made until all reasonable attempts have been made to recover the loss. A transfer cannot be made until the Board considers it is unlikely to recover anything further without undue cost and delay.
683.Subsection (5) provides that “recovery of value” means any increase in the value of the Pension Protection Fund as a result of payment received by the Board that is attributable to the offence that caused the reduction in value.
684.Subsection (6) provides that it is for the Board to decide whether a payment it receives is a recovery of value.
685.Subsection (7) provides that the amount of fraud compensation transfer payment must not exceed the difference between the reduction in value and any subsequent recoveries.
686.Subsection (8) provides that regulations will set out how the Board is to determine the amount of any fraud compensation transfer payment.
687.Subsection (9) clarifies that “the relevant date” has the same meaning as in section 182(10). This means that fraud compensation will only be paid in the case of an occupational pension scheme which is established under trust, if the value was reduced after 6 April 1997 and in the case of a scheme which is not established under trust, if the value was reduced after the date specified by an order under section 182(10).
The fund
Section 188: Fraud Compensation Fund
688.As well as the Pension Protection Fund maintained under section 173, the Board has to maintain a Fraud Compensation Fund. This section identifies the amounts to be payable into the Fraud Compensation Fund, and lists the categories of expenditure that may be charged to that Fund. Subsection (1) sets out that the Fraud Compensation Fund will consist of:
designated assets transferred from the Pensions Compensation Board when it is abolished under Part 9 of this Act;
the fraud compensation levy;
money borrowed from a deposit taker to enable the Board to meet liabilities under this Chapter (section 115);
interim compensation payments recovered under section 186 by the Board;
any income or capital gain arising from assets of the fund.
689.Subsection (3) lists permitted payments out of the Fund:
sums needed to meet any outstanding liabilities of the Pensions Compensation Board which are designated as liabilities of the Pension Compensation Fund;
fraud compensation payments made to the trustees or managers of schemes under section 185;
interim compensation payments made to the trustees or managers of schemes under section 186;
fraud compensation transfer payments made to the Pension Protection Fund under section 187;
capital repayments on loans under section 115 (borrowing) and interest payments on the capital borrowed.
690.Only those amounts specified in subsection (3) may be paid out of the Fraud Compensation Fund (subsection (4)).
The levy
Section 189: Fraud compensation levy
691.Subsection (1) of this section provides that the Board may impose a fraud compensation levy on occupational pension schemes which are eligible for fraud compensation.
692.Subsection (3) provides that the levy is payable to the Board by or on behalf of the trustees or managers or other prescribed person. Subsection (4) states that a compensation levy must be paid at a time and rate determined by the Board, but must not exceed the prescribed rate. When calculating the levysubsection (5) permits the Board to take into account estimated current and future expenditure as well as actual expenditure already incurred. Subsection (6) requires the Board to notify prescribed persons of the levy payable.
693.Subsection (7) sets out that the Board must determine the schemes to which the levy will apply. It must calculate the amount of the levy in respect of those schemes and notify any person liable to pay it of the amount and dates on which it is payable.
694.Subsection (8) enables the Board to delegate its functions under subsection (7) to the Regulator.
695.Subsections (9) and (10) provide that the amount of levy payable under this section is a debt due to the Board and is recoverable by the Board or by the Regulator on its behalf.
696.Further provision may be made through regulations for the Board to collect and recover the levy and the circumstances in which a levy may be waived.
