The Pension Schemes Act 2021 (the "Act") introduces new criminal offences relating to UK defined benefit pension schemes which can be committed by any person whose intentional or reckless conduct puts members' savings at risk. Read our recent article for further insight in to the key provisions of the Act.
The much awaited draft policy from the Pensions Regulator ("tPR" has now been published and sets out tPR's approach to investigation and prosecution of the new criminal offences. It should be noted that, in the UK, the Secretary of State and the Director of Public Prosecutions can also prosecute these offences. However this guidance only relates to tPR's approach. tPR's approach will be guided by the intention of Parliament for the Act not to change commercial norms or accepted standards of corporate behaviour but rather to tackle the more serious examples of this conduct and strengthen the deterrent effect of the punishment for that behaviour.
Summary of criminal offences under the Act
Avoidance of a statutory s75 employer debt (s58A of the Pensions Act 2004)
This offence is committed by any person who intentionally prevents the recovery of the whole or part of a s75 debt, prevents such a debt becoming due or reduces/compromises such a debt. However, the person only commits the offence if they didn't have a "reasonable excuse" for their conduct.
Conduct risking accrued scheme benefits (s58B of the Pensions Act 2004)
This offence applies to any person who acts in a way which detrimentally affects, in a material way, the likelihood of accrued scheme benefits being received (provided the person knew, or ought to have known, that the act would have that effect). Again, there is a requirement for tPR to establish a lack of "reasonable excuse" for the conduct.
The guidance explains that in deciding whether the material detriment test is met, tPR will take the same approach that it takes currently when considering whether the material detriment test is met for the purposes of issuing a contribution notice ("CN")1. In deciding what a person knew or ought to have known, tPR will consider the circumstances as they were at the time of the act and not with the benefit of hindsight.
There are many similarities between these new powers and tPR's existing powers to issue a CN. tPR now has the option to pursue a CN alone, to pursue a CN together with a criminal prosecution or, when the level of recovery under a CN is likely to be low, to pursue a criminal prosecution alone. The guidance suggests that this decision will be guided by the efficient use of tPR's resources to deter bad behaviour.
The requirement to establish the lack of a "reasonable excuse"
A person will not be guilty of an offence under ss58A or 58B if they had a reasonable excuse for their conduct.
The legal burden is on tPR to prove the absence of a reasonable excuse and so tPR is likely to allow time and opportunity for those being investigated to explain matters which might amount to reasonable excuse. tPR expects any such matters to be evidenced by contemporaneous records i.e. minutes, correspondence and written advice, highlighting the importance of ensuring records are made and properly filed or stored so that they can be accessed when needed. The question of whether a person has a reasonable excuse is fact-specific, however tPR has provided three factors which will be significant when investigating reasonable excuse:
- Whether the detrimental impact on the scheme was an incidental, rather than central, consequence of the conduct – an example of an 'incidental' consequence would be the employer's business being harmed by an unrelated party such as a lender refusing, revising or terminating a lending arrangement, where the purpose of the act was unrelated to the scheme (assuming the lender is not associated or connected with the employer). An example of a 'central' consequence would be where a key supplier terminates a supply contract with the purpose of bringing about the employer's insolvency so that it can buy the business (without the scheme) out of insolvency.
- The adequacy of any mitigation provided to offset the detrimental impact – an example of 'adequate mitigation' is where an employer that is legally supported by the covenant of a wider group of companies is sold to a buyer, terminating the wider support arrangements, and a combination of part of the sale proceeds together with guarantees from entities in the new employer group is provided fully to compensate for the loss of the seller group support. Another example is where the employer grants security for the benefit of entities outside the direct covenant, but the security provided is subordinated to all present and future liabilities of the scheme.
- Where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact – an example of 'no viable alternative' is where the employer faces a liquidity crisis and approaches its lending syndicate to increase the unsecured facilities. The members of the lending syndicate, who are under no obligation to do so, decline to lend further sums which triggers an insolvency process. The guidance suggests that although the lenders may be aware that failing to lend could result in the employer's insolvency, tPR would not expect them to lend if this was materially against their interests i.e. if the syndicate assesses that there is a higher risk of default on that further lending or that they will recover more of their committed lending if they call a default now.These are quite narrow examples and leave open the question of whether regulatory capital requirements, or institutional policy or strategy reasons will suffice to absolve syndicate members in such cases.
Other factors of significance, although not determinative alone, are engagement with tPR and the trustees and compliance with statutory notification requirements.
An adviser, whose advice assisted or encouraged conduct that had the effect described in either s58A or s58B will not be liable if they have a reasonable excuse for advising in the way that they did, even in circumstances where the principal has been found liable. The guidance suggests that a professional person acting in accordance with the professional duties, conduct, obligations and ethical standards applicable to the type of advice being given, is likely to have a reasonable excuse.
Although tPR recognises that proposing a Part 26A restructuring plan under the Corporate Insolvency and Governance Act 2020 could satisfy the criteria for s58A or s58B, tPR is likely to consider that the court sanction is a "reasonable excuse". This does raise questions as to whether this is the case even if the specific consequences of the restructuring plan for the pension scheme members are brought to the attention of the court.
The Act does not give tPR power to issue a clearance statement which would allow concerned parties to obtain a level of protection advance of entry into a transaction which might fall within the scope of the new criminal offences.
Examples of cases for investigation
Examples of cases which may be selected for investigation are:
- where the primary purpose of the conduct was the abandonment of the scheme without provision of appropriate mitigation;
- significant financial gains have been unreasonably made to the detriment of the scheme;
- there has been some other unfairness in the treatment of the scheme; or
- the trustees, tPR and/or the Pension Protection Fund have been misled or not appropriately informed.
Examples of acts for prosecution
Examples of cases which may be selected for prosecution are:
- the sale of an employer without replacing an existing parent guarantee over the employer's s75 debt, resulting in the loss of the guarantee (where the trustees were not told about the sale in advance);
- the purchase of an employer with no further investment in its business, subsequent mismanagement of the company and extraction of value before the company went into administration;
- the stripping of assets from an employer, which resulted in substantial weakening of the support for the scheme; or
- taking steps to bring about the unnecessary insolvency of the scheme employer with the intention of buying the employer's business without the scheme.
Further considerations for selecting cases for prosecution are:
- the person's relationship, duties and proximity to the employer, the scheme and the act or failure to act;
- the extent of their involvement or influence; and
- any direct or indirect benefits the person has received or is entitled to by reason of the act or failure to act.
Where there are grounds to suspect criminal conduct, any discussion will take the form of an interview under caution pursuant to the Police and Criminal Evidence Act 1984.
Helping or encouraging a person to commit an offence
The offences under both s58A and 58B of the Pensions Act 2004 can be committed by someone who, without a reasonable excuse, aids, abets, counsels or procures (referred to in the guidance as "helps or encourages") another person to do something that has the effect described in either of those sections. Any such person is liable to be tried and punished in the same way as the principal offender.
The guidance provides a number of practical examples such as:
- Legal adviser – helps an employer to lay a trail of false evidence to hide the employer's true intention for their actions and/or form the basis for a reasonable excuse defence.
- Investment manager – encourages a scheme to change investment strategy, for a performance fee, which results in a higher level of risk to members.
- Actuary– engaged by the employer to provide accountancy advice on whether the funding test for a flexible apportionment arrangement is met in the full knowledge they do not have the expertise to provide this advice, expecting the scheme trustees to rely on it, when there is a high probability that the replacement employer could not support the scheme in the way the test examines.
- Accountant– knowingly assists in a material misstatement of an employer's accounts in the knowledge they will be relied upon to support a going concern status in an upcoming sales process which causes material detriment.
There are a number of areas that we can see as being of potential concern, particularly in the current economic climate, and where advice will be needed. These include when structuring transactions in relation to companies in financial difficulty where new money is lent and (in particular) where security is being granted or the pension scheme claims are structurally subordinated. Loan to own and highly leveraged acquisitions will also call for careful consideration of these provisions and tPR's policy, once finalised.
The draft guidance provides insight into tPR's interpretation of the new powers given to them under the Act with examples of how tPR will put them into practice. The guidance does not seek to restrict the far-reaching application of the new criminal offences. However the examples go some way to provide comfort to third parties when dealing with a company with a defined benefit pension scheme.
The consultation on the draft guidance closed on Thursday 22 April 2021 and tPR intends to review all consultation responses and make any appropriate changes before publishing the final policy later this year. The new offences are likewise expected to come into force later this year. We will continue to track and report on these important developments.
1 A contribution notice requires the recipient to pay an amount up to the scheme's full buy-out deficit into a defined benefit scheme. The Act makes failure to comply with a contribution notice a criminal offence punishable by an unlimited fine.
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