What is all the controversy about?
The hotly debated Pension Scheme Bill, which gives the Pensions Regulator (the Regulator) powers beyond its wildest dreams, is now the Pensions 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 that effect, or
- 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 are below:
- 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 person's purpose.
- 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 the detriment.
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.
Originally published May 2021
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