Pension Schemes Act 2021 – The Pensions Regulator lays down a marker on enforcement

The Pension Schemes Act 2021 (PSA21) introduced important new criminal offences last month aimed at safeguarding members’ interests. In its draft policy (the Policy) published yesterday, the Pensions Regulator (TPR) clarified its approach to these offences and underlined its commitment to pursuing criminal investigations and prosecutions where it finds serious misconduct.

Some brief practical points

Criminal and/or civil penalties – how will TPR decide?

The Policy states that TPR’s process when deciding whether to use the new criminal offences will be similar to its process for contribution notices (under its existing powers).

While it could use both, the Policy does not explain much about when or how: it will make decisions based on its available resources and what could help deter future bad behaviour.

We may see it using a similar approach to the FCA, which has criminal and regulatory powers.. Here, we see investigations started on a “twin track” basis. This can lead to significant practical issues. This means that, on the consultation, we will ask about:

• when it will try to use its criminal and regulatory powers together
• how it will use information it gets for one purpose (eg contribution notices) in criminal investigations

Investigations by multiple authorities

The new offences which will soon be available to TPR will provide it with an additional way of dealing with the conduct of companies, individuals and their advisers whose conduct during transactions it considers has negatively affected the interests of members.

However, as demonstrated by the conviction of Dominic Chappell in 2020 for offences of cheating the public revenue, the same underlying facts may spark concurrent or overlapping investigations and, in due course, prosecutions and/or regulatory enforcement action by multiple enforcement authorities, potentially in different jurisdictions.

Investigations can be unnecessarily protracted and costs to suspects and others who may be required to provide information can escalate as the result of duplication or discussions as to which authority should take the lead.

The Policy is currently silent on how TPR proposes to coordinate with and exchange information with other enforcement authorities which may also have an interest in cases in which it may consider using its criminal powers.

Interaction with other regulatory requirements

The new offences set out in PSA21 which will soon be available to TPR do not exist in isolation. Even if investigations or prosecutions do not proceed, other regulators will be interested in whether suggestions of involvement in conduct negatively affecting members’ interests by those subject to separate regulatory or professional rules cast doubt upon their suitability to hold posts requiring licences or approvals.

Senior Managers within UK regulated financial services firms who are commonly involved in pensions related transactions may have particular questions about the interaction between the New Offences and requirements for them to take “reasonable steps” to avoid breaches of separate financial services regulatory requirements.

What happens next?

TPR has invited comments on the Policy by 22 April 2021. A finalised version of the Policy is then expected to be released ahead of the new offences entering into force on 1 October 2021.

Pension Schemes Act 2021 - UK

More detail

New criminal offences under PSA21

The new criminal offences introduced by PSA21 are:

• intentionally reducing or compromising a employer debt (i.e. a debt due under section 75 of the Pensions Act 1995) or preventing such a debt becoming due or being fully recovered (the Section 58A Offence)
• putting accrued benefits at risk where it was, or should have been known that the relevant actions would be materially detrimental to the likelihood of benefits being received (the Section 58B Offence)

A person does not commit either offence if they had a “reasonable excuse” for carrying out an activity covered by the relevant offence. The onus will be on TPR to establish that they did not have a “reasonable excuse” (as opposed to the person concerned needing to show that they did).

These offences (referred to in this briefing as the New Offences) will enter into force on 1 October 2021. Each is punishable by up to seven years’ imprisonment and/or an unlimited fine.

The Act contains three other offences relating to failures to comply with Contribution Notices issued by TPR and providing false or misleading information to TPR. The Policy does not provide any guidance in relation to these other offences.

Who may commit the New Offences?

The New Offences are intentionally broadly drafted. They may be committed by any person (i.e. individuals and corporate entities). This includes not only trustees and employers, but also potentially individual directors, investors and professional advisers (apart from insolvency practitioners, who are specifically excluded).

When will TPR consider using its criminal powers in respect of the New Offences?

Consistent with discussion in Parliament during the debates which shaped the New Offences, the Policy recognises that their purpose is not fundamentally to alter commercial norms or accepted standards of corporate behaviour, but rather to provide TPR with an additional option to pursue the most serious intentional or reckless conduct, and to broaden the range of parties it may pursue in respect of that conduct.

The Policy sets out examples of cases in which TPR may consider prosecuting advisers. These suggest that this option will be reserved for cases in which it appears to TPR that advisers have behaved dishonestly or in a manner falling significantly below applicable professional or regulatory standards.

Although the New Offences will only enter into force on 1 October 2021 and may only be used in respect of conduct occurring after that date, the Policy confirms that TPR will take account of conduct prior to that date where it considers that conduct is relevant to a person’s “intention” for the purposes of the section 58A Offence or knowledge for the purposes of the Section 58B Offence.

How will TPR decide whether to use the New Offences?

TPR will not routinely commence criminal investigations and prosecutions. However, it is an increasingly assertive and well-resourced enforcement authority. The Policy makes clear that it will not be afraid to investigate whether the New Offences have been committed and prosecute where it finds what it considers to be particularly egregious behaviour in the way in which schemes have been administered.

Reflecting the high-profile instances of alleged misconduct over recent years which bolstered public and political support for the New Offences, the Policy sets out the following as markers of cases in which criminal investigations and prosecution may be appropriate:

• cases in which it appears that the primary purpose of the conduct is the abandonment of the scheme without appropriate mitigation
• unreasonable financial gains to the detriment of the scheme
• some other unfairness in the treatment of the scheme; and/or
• cases in which the trustees, TPR and/or the Pension Protection Fund have been misled or have not been appropriately informed

The Policy makes clear that when deciding whether to prosecute particular individuals or corporate entities, TPR will consider:

• their relationship, duties and proximity to the employer, the scheme and the specific act or omission
• the extent of their involvement or influence
• any direct or indirect benefit(s) received by the person or to which that person is entitled by reason of the act or omission

What will be a “reasonable excuse”?

The Policy sets out three main factors which will be significant when determining whether a person had a “reasonable excuse” for a particular act or omission:

• whether the detrimental impact on the scheme/likelihood of full scheme benefits being received was an incidental consequence of the act or omission, as opposed to a fundamentally necessary step to achieve the person’s purpose
• the adequacy of any mitigation provided to offset the detrimental impact
• where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact

It sets out indicative examples of situations in which employers’ situations may mean that they (and by extension individuals and entities connected with those employers) are able successfully to establish that they had a “reasonable excuse” for a particular act or omission. These highly specific examples underline that TPR will need to make a detailed assessment of a wide range of factual and commercial factors when deciding whether to pursue and continue a criminal investigation or prosecution.

The Policy confirms that in cases where advisers are pursued on the basis that they assisted or encouraged an act by a person, separate assessments will be made about whether the person and the adviser had a “reasonable excuse”.

What is a “material detriment”?

The Policy states that TPR, when considering if a person has committed the Section 58B Offence, will apply the same statutory criteria as it currently does when deciding whether to issue a material detriment Contribution Notice, and will take into account relevant Determination Panel and court decisions.

It indicates that it does not expect to prosecute anyone who could establish a statutory defence in these contexts.

How will TPR decide what “should have been known”?

TPR has made a commitment in the Policy to looking at the circumstances “as they were at the time of the act and not with the benefit of hindsight based on knowledge of what happened since” when considering whether to take action using its criminal powers in respect of the Section 58B Offence.