From today, directors, lenders, investors and other parties to corporate activity which may jeopardise the interests of a defined benefit (DB) pension scheme face the spectre of criminal prosecution. The new pensions criminal offences and other regulatory sanctions which come into force today are broadly drafted and are likely to impact how corporates and other parties approach transactions, restructurings, intra-group finance arrangements, lending and security arrangements and other activity which may negatively impact a DB scheme.
Three new pensions criminal offences form the most high profile part of a range of new regulatory powers and sanctions designed to strengthen the existing pensions regulatory regime and afford greater protection to DB schemes. Alongside the new offences, the Pensions Regulator has been given:
- the power to impose fines of up to £1 million in a range of circumstances,
- enhanced powers to require DB sponsors and related parties to make immediate payments into their scheme, and
- extended information gathering powers.
The government is also planning to introduce new reporting requirements in relation to certain material corporate transactions and the granting of security which will rank ahead of a DB scheme, in April 2022. This is likely to mean corporates will be required to notify the Regulator (and their scheme's trustees) at about such transactions at a much earlier stage.
Going forwards, parties to transactions and arrangements which may detrimentally impact a DB scheme need to ensure they have fully considered whether these new offences and sanctions will be engaged. To do so, they will need to assess the potential impact of the transaction or arrangement on the scheme, how any detrimental impact can be avoided or mitigated and whether they have a reasonable basis for their actions. They will also need to consider when and how to engage with the scheme's trustees and the Pensions Regulator.
Following a series of high profile corporate failures, the government decided to strengthen the pensions regulatory regime to deter companies and other parties (such as lenders, investors and advisers) from taking action which, broadly speaking, is materially detrimental to a DB scheme. The new measures, which come into force today, include:
- three new criminal offences, including offences for actions that are materially detrimental to a DB scheme and for avoiding or reducing an employer debt to a scheme
- new financial penalties of up to £1 million which will apply in a wide range of circumstances
- two new contribution notice triggers, and
- enhanced information gathering powers, including the power to inspect company premises and power to compel a person to attend an interview with the Pensions Regulator and to answer questions
The criminal offences are widely drafted and they could potentially be engaged by a wide range of corporate activity. In particular, a criminal offence will be committed where a person does an act or fails to act or engages in a course of conduct:
- that detrimentally affects in a material way the likelihood of accrued benefits under a DB occupational pension scheme being received
- the person knew or ought to have known that it would have that effect, and
- the person did not have a reasonable excuse for the act, failure or for engaging in the course of conduct.
A criminal offence will also be committed where a person does an act or fails to act or engages in a course of conduct:
- that prevents the recovery of a debt that is due and payable under section 75 of the Pensions Act 1995 (which may arise, for example, where a sponsoring employer is sold out of its group, ceases to employ any active members in the scheme, becomes insolvent or is wound-up), prevents such a debt becoming due or compromises, settles or reduces such a debt
- the person intended the act, failure or course of conduct to have that effect, and
- the person did not have a reasonable excuse for the act, failure or for engaging in the course of conduct.
These offences carry a maximum penalty of up to seven years imprisonment and/or an unlimited fine.
In most instances, it is expected any prosecution would be brought by the Pensions Regulator. However, a prosecution may also be brought by other persons or bodies, including the Secretary of State for Work and Pensions and the Director of Public Prosecutions.
Unlike the Regulator's powers to issue contribution notices and financial support directions, which can only be used against sponsoring employers and "connected" or "associated" persons, these new offences can be committed by any person who is party to a relevant act, failure to act or course of conduct (other than an insolvency practitioner acting in their capacity as such). This includes sponsors of DB schemes, directors of scheme sponsors, other group companies and the directors of those companies as well as investors, lenders, trustees and advisers.
A criminal prosecution could also be brought against any person who assists with the commission of a relevant act or course of conduct.
There is no time limit on when the Regulator can bring a prosecution for these new offences, unlike its power to issue contribution notices which it can only exercise for up to six years after a relevant act or failure.
Where a person has committed a relevant act or failure and is shown to have the requisite intent they will have committed a criminal offence unless they have a "reasonable excuse" for their actions. In the first instance it will be for the relevant prosecuting authority to determine whether a person has a reasonable excuse. Ultimately, however, this will be a matter for the Court or, depending on the circumstances, a jury to decide.
The Regulator has published a policy on how it intends to enforce the new criminal offences. This highlights the following three factors which it says will be significant in determining this:
- 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, and
- where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact.
The Regulator may also take account of other factors including:
- a person’s reasons for acting in the way that they did, and the reasonableness the
- the circumstances in which the act took place, including the person’s own circumstances, and
- the timing, extent and openness of any communications with the scheme's trustees, the Regulator and, where relevant, the Pension Protection Fund.
Alongside the criminal offences, the Regulator also now has the power to issue financial penalties of up to £1 million in a wide range of circumstances, including in circumstances similar to those covered by the new criminal offences. In particular, the Regulator will be able to impose a fine on a person who is a party to an act or deliberate failure to act (or a series of acts or failures):
- that detrimentally affects in a material way the likelihood of accrued benefits under a DB occupational pension scheme being received (where the person knew or ought to have known it would have that effect), or
- the main purpose, or one of the main purposes of which, was to prevent the recovery of a section 75 debt that is due and payable from and employer, to prevent such a debt becoming due or to compromise, settle or reduce the amount of such a debt, where it was not reasonable for the person to act or fail to act in the way that they did.
Once again, a fine under these new powers can imposed on any person to a relevant act, failure to act or course of conduct (other than insolvency practitioners acting in their capacity as such) and on any person who knowingly assists in a relevant act, failure or course of conduct. However, the Regulator will need to show that it was not reasonable for the person to act or fail to act in the way that they did.
The Regulator will also be able to impose a fine of up to £1 million where a person:
- knowingly or recklessly provides false or misleading information to the Regulator or a scheme's trustees
- fails to report a notifiable event to the Regulator, without a reasonable excuse (this applies to both scheme-related and employer-related notifiable events)
- fails to submit a notification and "accompanying statement" in respect of a material corporate transaction or the granting of security (once these new requirements are in force), or
- fails to comply with a section 38 contribution notice, without a reasonable excuse.
As with the criminal offences, there is no time limit on when the Regulator can impose a fine under these new powers.
Depending on the circumstances, it may be easier for the Regulator to impose a civil fine on a relevant person (as opposed to securing a criminal conviction) on the basis a civil penalty is subject to a lower standard of proof.
New contribution notice triggers
The Pensions Regulator has also been given extended powers to issue contribution notice to require a DB scheme sponsor or a connected or associated party to make an immediate cash contribution into a scheme. In addition to the existing triggers (which are engaged where there is a material detriment to a DB scheme or the avoidance of an employer debt), these new triggers will mean that the Regulator will be able to issue a contribution notice where, in the opinion of the Regulator, broadly:
- a relevant act or failure would have materially reduced the amount of a DB scheme would stand to recover on the hypothetical insolvency of a scheme sponsor, or
- an act or failure has reduced the resources of a scheme sponsor to a material extent.
Unlike the existing material detriment contribution notice trigger, the new employer insolvency and employer resources triggers involve more objective, point in time tests which are designed to make it easier for the Regulator to establish that a relevant trigger event has occurred.
In its updated Code of Practice the Regulator summarises circumstances in which it might expect to issue a contribution notice using its new or pre-existing powers. This includes:
- where sponsor support is removed, substantially reduced or becomes nominal
- where a DB scheme’s creditor position is weakened
- some instances of paying a dividend or a return of capital by the sponsoring employer, and
- payments favouring other creditors of the employer over the scheme where no such sums are then due to those creditors.
More detailed examples are set out in related guidance.
As well as showing that a relevant act has occurred, the Regulator also needs to show that it is reasonable to impose a contribution notice in the circumstances. A statutory defence may also be available where a person can show that, broadly, they have considered the impact of their actions on the scheme and taken all reasonable steps to mitigate any detriment to the scheme.
The Pensions Regulator has indicated that the new criminal offences are not targeted at what, in its view, amounts to ordinary commercial activity. However, given the breadth of the offences and the other regulatory sanctions and the uncertainty which surrounds there application, going forwards, it is critical that corporates and other parties to corporate transactions, restructurings and finance arrangements (such as lenders and investors) which may impact a DB scheme, fully consider:
- the potential impact of the transaction or arrangement (and any post-transaction activities) on the scheme and whether the new offences and sanctions could be engaged
- the extent to which any material detriment to the scheme can be avoided or mitigated
- whether they have a reasonable excuse for their actions
- when and how to engage with the scheme's trustees and the Pensions Regulator (where this is necessary), and
- whether it may be appropriate to seek clearance from the Regulator in relation to the proposed transaction or arrangement.
The Regulator expects any person it investigates to explain their actions and put forward sufficient evidence of any matters that might amount to a reasonable excuse. It also expects the basis for any reasonable excuse to be clear from contemporaneous records such as minutes of meetings, correspondence and written advice. Therefore, it is important that corporate decision-makers and other parties maintain records of:
- the decision making process
- the assessment of how the scheme may be impacted and the adequacy of any mitigation that is offered/provided
- any engagement with the scheme's trustees and/or the Regulator, and
- any advice received.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021