On 29 September 2021, the Pensions Regulator (tPR) published its long-awaited policy (Policy) on how it intends to exercise its criminal offences powers under the Pension Schemes Act 2021 (the Act).
The key takeaway from the Policy is that tPR is not intending to prosecute behaviour which it considers ordinary commercial activity. As with its "moral hazard" powers, tPR will adopt a risk-based and proportionate approach.
The Policy contains some very helpful guidance on the "reasonable excuse" defence. There is, however, very little guidance for pension scheme trustees who are within the scope of the criminal powers (but are generally outside the scope of the moral hazard powers), a gap that was identified by many commenters at the consultation stage.
Of course, any convictions will be the decision of the courts and tPR has said that the Policy will be reviewed following any court decisions and in line with tPR's experience as the new offences are prosecuted.
A recap of the new criminal offences
Under the Act, as of 1 October 2021, the following are criminal offences:
- any person engaging in activity that has a materially detrimental impact on scheme benefits (Material detriment offence). The offence carries the risk of an unlimited fine and up to seven years in jail;
- an act or failure by a person intended to prevent the recovery of a Section 75 debt1 (being the deficit in the scheme measured on the basis that members' benefits are secured with an insurance company) (Employer debt offence). A person found guilty of this offence could face up to seven years' imprisonment or an unlimited fine.
(Note: A person in the context of these two offences can be anyone (including the employer, the scheme trustees and their advisers) unlike tPR's moral hazard powers which are exercisable only against an employer participating in the scheme or anyone connected or associated with the employer); - failure to pay sums due under a contribution notice. This offence is punishable by an unlimited fine; and
- providing tPR with information which is materially false or misleading in relation to prescribed matters. A person found guilty of this offence could be faced with a fine and/or up to two years in prison.
Unlike its moral hazard powers (where, for instance, a six-year time limit applies for the imposition of a contribution notice), there is also no time limit on when tPR can bring proceedings for these new offences.
Scope of the new criminal powers and impact on corporate activity
Unlike tPR's anti-avoidance powers, which are exercisable against any employer that participates in the schemes (and companies/persons connected or associated with them), the criminal sanctions can be brought against any person. The trustees (who are generally outside the scope of the moral hazard powers), their advisers and even the lenders are also within scope.
M&A activity, payment of special dividends, company borrowings (particularly where security is granted to a lender), solvent and insolvent restructurings and investment activity could all be caught by the new powers.
The new criminal offences
The Policy sets out the three different "elements" to the criminal offences:
- an act element (essentially summarising the offences above);
- a mental element; and
- the reasonable excuse defence.
The "mental" elements
There are different mental elements to the offences.
- Under the Material detriment offence, the mental element of the offence is met if the person intended their act to have the relevant effect.
- The mental element is met under the Employer debt offence where someone knew or ought to have known, taking into account the circumstances as they were at the time of the act, that their act would have a materially detrimental effect on the pension scheme.
Reasonable excuse defence
Even if both the "act" element and "mental" element are proven, a person will only have committed an offence if they do not have a reasonable excuse for carrying out the act.
Although ultimately it will be a matter for the criminal courts to decide (as is the case for the "act" element and the "mental" element), tPR will consider the following when assessing whether there was a "reasonable excuse":
- whether the detriment to the scheme was central to or an incidental consequence of the act or omission;
- each person's reasons in isolation – for instance, where a sponsoring employer is extending its borrowing, whether the bank/lender had a reasonable excuse is not affected when assessing the reasonableness of the actions (unless the parties are acting together);
- the circumstances i.e. any time constraints to which a person was subject and the person's own circumstances – for instance, if a director has extensive experience of refinancing, this may be relevant to their awareness of potential options and viable alternatives;
- the adequacy of any mitigation provided to offset any detrimental impact;
- where no, or inadequate, mitigation was provided, whether there was an available alternative which would have avoided or reduced the detrimental impact;
- the extent to which communication and consultation with the trustees of the scheme took place before the relevant act;
- in the case of anyone who owes fiduciary duties to the scheme (i.e. scheme trustees), the extent to which they complied with those duties; and
- where the person was acting in a professional capacity, whether they acted in accordance with the applicable professional duties, conduct obligations and ethical standards.
The legal burden is on tPR to prove the absence of a reasonable excuse but tPR has stressed that this does not mean that tPR has to identify and disprove every possible excuse open to someone. tPR expects those whom it investigates to put forward sufficient evidence of any matters that might amount to a reasonable excuse – as evidenced by contemporaneous records, such as minutes of meetings, correspondence and written advice.
Examples of corporate activity
The Policy also contains case studies of corporate activity that could be within the scope of the criminal powers. One case study looks at a refinancing/secured loan taken out by an employer.
In terms of whether any detriment was central or incidental to the purpose, a number of examples are also given. One such example would be where a sponsoring employer can only afford to pay minimal dividends and its parent instructs the employer to direct new business to a new group company (rather than conduct it through the employer) and the employer becomes unable to properly fund the scheme as a result, tPR will consider the detriment to be central to the purpose.
The Policy gives various scenarios where there was a less detrimental viable alternative to an act or omission. One such example would be where an employer facing imminent insolvency, whose directors choose to declare a dividend shortly before appointing administrators and, as a result, in administration the scheme receives 20p in the £, as do the other unsecured creditors, the directors have breached their duty to have regard to the interests of the company’s creditors as a whole. There was a viable alternative of not declaring the dividend, which would have been less detrimental to the pension scheme.
Most notably absent in the examples given, however, are scenarios that pension scheme trustees may face. Whilst it is useful to know that tPR will consider whether the trustees have complied with their fiduciary duties, there is no guidance as to what that means in particular scenarios. For instance, if trustees are unable to agree mitigation for the pension scheme with its employer, would a failure promptly to notify tPR of this be considered a breach of their fiduciary duties.
No retrospective effect
The new criminal offences do not have retrospective effect and tPR can only prosecute acts committed on or after 1 October 2021. The Policy states that any acts pre-dating 1 October 2021 may be relevant to investigation or prosecution after that date (for example, if it indicates intention). On the flipside, potential targets of tPR criminal investigation or proceedings can also refer to decisions or actions taken before 1 October 2021 to show that they had a reasonable excuse.
Further policy consultation
At the consultation stage, there were calls for the Policy to be given more context. tPR has therefore issued further consultations on three draft policies:
- overlapping powers: setting out its approach where it has the option to pursue both criminal and/or regulatory powers in respect of the same set of circumstances;
- an update to its monetary powers policy to impose high fines for information gathering and avoidance-related scenarios; and
- information gathering power: the use of Section 72 notices, interviews and inspections in the context of its enforcement cases, including its approach to the new fixed and escalating penalty powers for non-compliance.
The consultation period to the above policies closed on 22 December 2021 and tPR's response is awaited.
Companies which sponsor defined benefit schemes should carefully consider the risk of the new criminal powers of tPR being triggered on any corporate activity, particularly in light of the guidance set out in the Policy.
- A debt under Section 75 or 75A of the Pensions Act 1995, which is calculated on the assumption that the liabilities in respect of all members are secured by the purchase of annuities with an insurance company.
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