S120 Notices – The Hidden Dangers for Insolvency Practitioners

Section 120 of the Pensions Act 2004 is a continuing administrative headache for Insolvency Practitioners and latest findings have highlighted a dangerously growing trend of just relying on the Pension Protection Funds online facility to find a company pension scheme.

The Pensions Act 2004 came into play in 2005 and with that came the launch of the Pension Protection Fund, a compensation scheme for Defined Benefit (Final Salary) pension schemes where the sponsoring employer suffers an insolvency event. Since inception, the Pension Protection Fund has paid out £793 million in compensation.

Insolvency Practitioners have a statutory duty under s120 of the Pensions Act 2004 to notify the Pension Protection Fund (PPF), the Pensions Regulator (TPR) and the Scheme Trustees about their appointment to an insolvent employer where the employer had an occupational pension scheme. This statutory duty has to be complied with, within 14 days of the insolvency appointment or within 14 days of becoming aware of a pension scheme. Upon receipt of the s120 notice the PPF will determine whether the pension scheme and its members are eligible for compensation. As at 31 March 2013, the PPF had a further 223 pension schemes in assessment with assets of £5 billion and liabilities of £6.5 billion.

To assist IPs, the PPF devised an online S120 facility that can detect any Trust Based registered company pension schemes. In principle this was a saving grace for IPs as the difficulty with company pension schemes is actually finding them in the first place. However, it transpires that some IPs are over relying on the PPFs online facility and overlooking the statutory requirement to submit an s120 notice for a pension scheme that subsequently emerges where the PPF online facility failed to find a scheme.

To condemn matters for IPs the PPF have confirmed the following on their website “If you are aware of a defined benefit scheme being associated with this employer and it is not showing in your online search please submit a paper s120 notice. “ This is fraught with danger for a number of reasons, firstly it is not clear to an IP when finding a pension scheme whether it is defined benefit or defined contribution and secondly there are hybrid pension schemes out there that can appear to be defined contribution schemes but actually have a defined benefit element to them.

The statutory obligation to s120 remains unchanged and states that an IP should still complete an s120 notice for “all” occupational pension schemes as it is not the role of the IP to determine whether the scheme is defined benefit, defined contribution or a hybrid pension scheme eligible for entry into the PPF.

To ensure that IPs don’t fall foul of their statutory obligations we would recommend completion of the s120 notification online within 14 days of their insolvency appointment and then download, complete and submit a paper s120 notice form for any other company pension schemes that are subsequently found.