New criminal powers for the Pensions Regulator
The hotly debated Pension Schemes Bill, which gives the Pensions Regulator (the Regulator) powers beyond its wildest dreams, is now the Pension Schemes Act 2021 and officially on the statute book.
So what is all the controversy about and is it really
justified? Read on for the answers to the key
questions you need to know.
What is the background to the new powers?
Many recent high profile insolvencies (BHS, Carillion, Toys
R Us to name a few) involved defined benefit pension
schemes which have been left underfunded leaving some
members with reduced benefits and putting more pressure
on the Pension Protection Fund. There have been
concerns the Regulator's existing powers were not strong
enough to take action where the insolvencies were seen
to be connected with immoral corporate activity. So the
idea behind the new powers is to make sure the Regulator
has the breadth and strength of powers it needs if similar
situations arise in the future.
What exactly are the new powers?
The most significant change is the introduction of two new
criminal offences which are punishable by an unlimited
fine and/or up to seven years in prison. A person is guilty
of these offences where they engage in conduct that:
- Has the effect of, broadly, avoiding or reducing or
preventing the payment of an employer debt to
the scheme and intended the conduct to have
- Risks accrued scheme benefits by detrimentally
affecting in a material way the likelihood of
benefits being received.
Are there any other new powers?
Yes, a number of other important new powers and
offences have been introduced. Some of the key ones
- Contribution Notice regime extended - two new
grounds on which the Regulator can issue a
Contribution Notice have been put in place. These
include the Employer Insolvency Test and the
Employer Resources Test. The Employer Insolvency
Test is met if, on a hypothetical insolvency scenario,
there is a material reduction in the amount that would
be recovered by the scheme after the relevant act or
omission. The Employer Resources Test is met if the
act or omission reduces the employer's resources and
the reduction is material relative to the section 75 debt.
- £1 million financial penalties - the Regulator can
now impose financial penalties of up to £1 million in
certain circumstances. These include where a person
knowingly or recklessly provides false or misleading
information to the Regulator or scheme trustees, fails
to comply with reporting requirements or engages in
conduct risking accrued scheme benefits.
- Stronger information gathering powers – new
reporting duties are being introduced which will require
information about certain events to be sent to the
Regulator. These are to be set out in underlying
regulations but are expected to include the sale of a
controlling interest in a scheme employer, the sale of
the business or assets of a sponsoring employer and
the granting of security which reduces recovery to the
scheme on an insolvency.
Why are they so controversial?
The new criminal offences have attracted the most
controversy. The key reasons they have garnered so
much attention are:
- The extremely severe penalties of up to 7 years in
prison and/ or an unlimited fine.
- Any "person", other than insolvency practitioners, can
be held guilty. This is a step change to the existing
Regulator's powers which are limited in scope to those
connected or associated with scheme employers. It
brings trustees, advisers (including actuaries, lawyers
and investment consultants, for example) and other
third parties such as banks within scope.
- There is significant uncertainty on what conduct falls
within the offences, particularly the offence of risking
accrued scheme benefits. This offence also does not
require malicious intent as it can be committed where
the person knew or "ought to have known" the conduct
would have that effect.
What is the reasonable excuse defence?
Both of the two new criminal offences mentioned above
will be subject to a defence of a reasonable excuse. The
Regulator's draft policy on the new offences indicates that
it will consider the following when assessing if a
reasonable excuse has been established:
- Whether the detrimental impact was incidental to the
conduct or fundamentally necessary to achieve the
- The extent of any mitigation provided to offset the
impact on the scheme.
- Where no mitigation was provided, whether there was
a viable alternative that would have reduced or avoided
When will the new powers come into force?
Whilst the Pension Schemes Act 2021 has received Royal
Assent, the new powers are not going to be available to
the Regulator until later this year, probably from 1 October
2021 but this has yet to be confirmed.
Will the new powers be retrospective?
The Regulator has said that it does not expect to enforce
the new powers retrospectively.
However, the draft policy on prosecution of the new
criminal offences states that the Regulator will look at
evidence pre-dating commencement where it is relevant to
its investigation of actions after that date if it indicates
someone's intentions. Therefore, those with any
involvement in defined benefit schemes should be wary of
how their actions before the new powers come into force
could be interpreted.
Also, the drafting introducing the new Contribution Notice
tests suggests they could be enforced retrospectively for
activity that took place in the previous six years. This has
led to concern that the Regulator may retain this option
despite its guidance on enforcement.
What does all this mean in practice?
The Regulator has said that, despite the breath and extent
of the new powers, they are not intended "to change
commercial norms or accepted standards of behaviour."
The Regulator has clarified that the new criminal powers in
particular are intended to tackle the more serious
examples of intentional or reckless conduct that puts
members' savings at risk and strengthen the deterrent and
punishment for that behaviour.
However, bearing in mind the very severe penalties,
uncertainty of scope and that any individual or
organisation can be targets, it seems likely that the new
powers will have a considerable impact on corporate
activity and decision making.
Employers, trustees, lenders and those advising them will
want (and need) to make sure they are not potentially
within the scope of the new powers. That will inevitably
involve taking advice and considering the possible risks of
even routine and day to day business activities. For
example, paying dividends, private equity owners
increasing the level of debt and refinancing (even if not
secured) could all be within scope and an analysis on the
risks will need to be done.
What can those at risk do to prepare?
The first step is for those with any involvement whatsoever
with a defined benefit pension scheme (including advisers
and lenders) to educate themselves on the Regulator's
new powers so they are clear on what grounds they could
potentially be targeted once the new powers come into
force later in 2021.
Going forward, unless the Regulator provides clearer
guidance, assessing the pensions risk, taking appropriate
advice and keeping clear written records will need to
become more entrenched and a standard part of
commercial decision making by organisations at all levels.This will be particularly important where material financial
decisions are being made such as making large dividends,
refinancing and restructuring as well as M&A activity.
If you have any questions please do get in touch.