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Draft Pensions Regulator policy on new criminal sanctions: is it a ‘get out of jail free’ card?

  • United Kingdom
  • Pensions

12-03-2021

The Pensions Regulator (TPR) yesterday began consulting on its approach to the investigation and prosecution of the new criminal sanctions in the Pension Schemes Act 2021 (the Act), including publishing a draft policy. The draft policy reveals TPR’s proposed approach, and includes examples of what could trigger action under the offences and what could be a reasonable excuse. 

Due to the broad reach of these new criminal sanctions, this consultation should interest both trustees and employers, and also anyone else involved with defined benefit (DB) schemes.  

TPR's draft policy - brief summary

While the draft policy is a helpful guide to TPR’s proposed approach, there’s still a lot of uncertainty. Just complying with the policy is no ‘get out of jail free’ card in relation to the new offences.

We plan to respond to the consultation to ask about TPR’s ability to take into account things that happen before the powers come into force.  When combined with the lack of statutory limitation period and no clearance process, there is little comfort about the period over which actions can be judged.

The examples of ‘reasonable excuses’ are useful.  However, it would be good to see more in the final policy to help clarify the defence (particularly in relation to restructurings).

TPR’s comments about using these powers as a deterrent and in the public interest suggest that an example might be made of a high profile entity reasonably soon after the powers come into force. However, TPR also talks about how its resources will impact what it can do: it is likely to choose its targets very carefully.

The new offences can also be used by the Secretary of State or the Director of Public Prosecutions (or equivalent in Scotland and Northern Ireland). They could adopt a different approach in terms of what merits investigation and prosecution. And it is ultimately up to the courts to decide on the interpretation of the law – a court’s view might differ from TPR’s policy.

If you are planning a transaction which potentially affects a DB scheme or its covenant, keep these powers at the forefront of your decision-making and processes. This will include carefully documenting decisions and advice, early engagement with trustees and, where appropriate, TPR.

Brief actions

The consultation closes on 22 April 2021 and TPR says it will publish the final policy “later in the year”. We expect this to be before the new powers come into force, which is planned for October.

Those involved with DB schemes should consider responding to this consultation, noting the deadline of 22 April 2021.    

Some more detail on TPR's draft policy

The criminal offences

The Act adds two criminal offences (“avoidance of an employer debt” and “conduct risking accrued scheme benefits”) at new sections 58A and 58B of the Pensions Act 2004.  The offences and linked sanctions are expected to come into force around October 2021.

Both offences relate to DB schemes and are punishable by up to seven years in prison and/or an unlimited fine. They apply to any person, including trustees, employers, professional advisers and anyone else (including lenders). Only insolvency practitioners are excluded.

No offence is committed if there is a “reasonable excuse”: it will be for the prosecution to prove the absence of a reasonable excuse. There will be no TPR clearance process for the new offences as there is for contribution notices and financial support directions.

The sanctions (see the 2018 White Paper) were originally intended to punish “wilful or grossly reckless behaviour”.  However, the criminal offences are actually drafted so widely, they could impact legitimate corporate activity, such as business or asset sales, restructurings, granting security or paying dividends.  In addition, it hasn’t been clear what a “reasonable excuse” means, and this is what TPR’s draft policy starts to address.

For more details about the Act, please see our Guide to the Pension Schemes Act 2021.

What are the key points in the draft policy?

TPR’s approach

TPR says it does not expect the offences (despite their wide drafting) to change commercial norms or accepted standards of corporate behaviour: they are aimed at “more serious intentional or reckless conduct”.  It expects its process for prosecuting these offences to be broadly the same as for contribution notices or where the deterrent effect might be in the public interest.

Limitation period

The draft policy states that there is no limitation period for these powers, so the threat of criminal sanctions will potentially remain indefinitely after an event.  

Note: Check your insurance policies and indemnities to assess what cover is provided.

Look-back period

written statement from the Pensions Minister in January 2021 confirmed that the new criminal offences would not be retrospective, applying to an act or a series of acts which take place after the powers come into force.  However, TPR says in the draft policy that evidence pre-dating the commencement date of the new powers “may be relevant” to their investigations, for example if it indicates someone’s intention. 

Note: This doesn’t appear to bring pre-commencement acts into scope for prosecution but it does mean parties should be conscious of the new powers where they are contemplating action that might take place at a future date.

Reasonable excuses

People being investigated will need to show clear and contemporaneous evidence of their ‘reasonable excuse’.  

Note: It will be important to have written advice and a good audit trail on decisions – documents may be required to form the basis of a reasonable excuse defence in years to come.

Each case will depend on its facts but TPR points to three key factors:

  • was the detrimental impact an “incidental consequence” or a “fundamentally necessary step to achieve the person’s purpose”?
  • does any mitigation fully compensate for the loss?
  • if not, is there a viable alternative that would have avoided or reduced the detrimental impact?

TPR recognises that a party can have regard to its own interests.  For example, if a lender fails to advance further funds that are necessary for the survival of a business (where not legally required), TPR states that it would not expect lenders to do so if it was against their interests.

When is TPR likely to prosecute?

Factors include whether the parties have complied with the notifiable events regime and the openness and timeliness of communication with TPR.

Note: Consider a notifiable events protocol and training on TPR’s new powers for key people.   

Other factors could include if significant financial gains have been “unreasonably made” to the detriment of the scheme, there is “some other unfairness” in the treatment of the scheme or TPR/the Pension Protection Fund have not been appropriately informed.

Find more insights on the Pension Schemes Act 2021 here.