Pensions Alert: Consultation on the Pensions Regulator's new powers

The Pension Schemes Act 2021 contains provisions introducing new powers for the Pensions Regulator (Regulator). These powers include two new criminal offences which are expected to come into force in the autumn: the offence of avoidance of employer debt and the offence of conduct risking accrued scheme benefits. On 11 March the Regulator published a consultation on a draft policy setting out its proposed approach to the investigation and prosecution of these new offences. In this Pensions Alert, we provide an overview of some key points to note from the consultation.

The new criminal offences

The new criminal offences relate to defined benefit schemes and carry maximum penalties of seven years imprisonment or a fine or both.

• A person commits the offence of avoidance of employer debt if they: (1) do an act or engage in a course of conduct that prevents the recovery of the whole or any part of a section 75 debt, prevents such a debt becoming due, compromises or otherwise settles such a debt or reduces the amount of such a debt which would otherwise become due; (2) intended the act or course of conduct to have such an effect; and (3) did not have a reasonable excuse.
• A person commits the offence of conduct risking accrued scheme benefits if they: (1) do an act or engage in a course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits being received; (2) knew or ought to have known that the act or course of conduct would have that effect; and (3) did not have a reasonable excuse.

References in the above criteria to an act or course of conduct include a failure to act.

The Regulator’s draft policy notes points of commonality and differences between the new offences and its existing power to issue a Contribution Notice (CN). Differences include that the new criminal offences can be committed by anyone other than an insolvency practitioner appointed and acting within the scope of that appointment. However, a CN can only be issued to someone who was, at any time in the relevant period, the employer in relation to the scheme or connected with, or an associate of, the employer (an exception for insolvency practitioners also applies in relation to CNs).

The Regulator’s approach

The draft policy reports that, as the Bill progressed through Parliament, ministers confirmed that the offences were not intended to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour in the UK. Rather, the Regulator understands that they were aimed at enabling it to address the more serious intentional or reckless conduct that was already within the scope of its CN powers, or would be in scope if the person was connected with the scheme employer. The Regulator states that its approach will be guided by its understanding of this policy intention.

Other points of note in the draft policy include the following.

• While the introduction of the new offences is not expected to change the kind of behaviour the Regulator investigates, there will be a fundamental change to the options available to it.
• The Regulator will use these powers where the seriousness of the behaviour warrants such intervention to further its statutory objectives and protect savers.
• Both the CN and the criminal offences have a deterrent effect. Whether the Regulator decides to use the CN or the criminal offences or both will be guided by the efficient use of its resources to deter repetition of similar bad behaviour and act as a warning to others.
• The Regulator’s approach to the prosecution of the new offences will be closely linked to its existing CN power, in that it would expect to consider a case for prosecution in broadly the same circumstances where it would consider seeking a CN.
• There may be circumstances where the Regulator will not pursue a CN, for example where the target’s resources mean the amount of recovery would be low, but would still consider prosecution because its deterrent effect might be in the public interest. It may also decide to pursue a CN but not prosecute a target.
• In deciding whether the material detriment test is met for the purposes of the offence of conduct risking accrued scheme benefits, the Regulator will take the same approach as when considering issuing a CN on the grounds of the material detriment test. The Regulator would not usually expect to prosecute anyone under this criminal offence who could establish a statutory defence to a material detriment CN. More information on the statutory defence can be found at paragraph 192 of the Regulator's guidance on clearance.
• A person who helps or encourages someone to commit either of the offences is liable to be tried and punished in the same way as the principal offender, although these actions will not be considered offences if the person has a reasonable excuse. The draft policy includes a section on secondary liability which considers the position of advisers. That section includes that, in most instances, a professional person, acting in accordance with their professional duties, conduct, obligations and ethical standards applicable to the type of advice being given, is likely to have a reasonable excuse.

The Regulator notes that, although the policy sets out its interpretation of the new offences, the courts will ultimately decide the correct interpretation of the law. It is also noted that the Regulator is not the only prosecuting authority for these offences, and its policy may not reflect the interpretation of the other prosecuting authorities or their approach to investigation and prosecution of the offences.

Reasonable excuse

As noted above, one of the criteria for the offences to apply is that the person did not have a reasonable excuse for doing the act or engaging in the course of conduct. The legal burden is on the prosecution to prove the absence of a reasonable excuse, but the draft policy states that this does not mean that the prosecution must identify and disprove every possible excuse open to someone. The Regulator expects those 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 the reasonable excuse to be clear from contemporaneous records such as minutes of meetings, correspondence and written advice.

The Regulator states that what amounts to a reasonable excuse in any particular case will be fact specific, but the following three factors will be significant in determining whether there is a reasonable excuse for the 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 Regulator states that the more incidental the detriment was to the person’s purpose, the more that purpose would tend towards establishing a reasonable excuse. The examples in the draft policy of scenarios in which the detrimental impact might be considered incidental include where the employer’s business is harmed by ordinary business activity conducted on arm’s length terms by an unrelated party, such as a supplier or customer terminating a business relationship, or a lender refusing, revising or terminating a lending arrangement, where the purpose of the act was unrelated to the scheme.
• The adequacy of any mitigation provided to offset the detrimental impact.
  
  The Regulator states that where the detrimental impact has been fully mitigated, the person is more likely to have a reasonable excuse. Examples in the draft policy of scenarios where the mitigation might be considered adequate include 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 being paid to the scheme and the provision of guarantees from entities in the new employer group fully compensate for the loss of the seller group support.
• Where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact.
  
  The Regulator states that if there was a viable alternative with a less detrimental impact, that would suggest an absence of reasonable excuse. The draft policy provides examples of scenarios in which it might be considered that there was no viable alternative. The draft policy also states that, when considering whether a viable alternative existed, the Regulator will do so in the expectation that the scheme is treated fairly, particularly in circumstances where other parties have benefited from the act or failure. However, the Regulator will not generally expect someone to pursue an alternative that means unreasonably disregarding their interests.

The draft policy also notes that there are additional factors which may have a bearing on whether to begin or continue a criminal investigation but are unlikely to be determinative alone. For example, these factors include the extent of communication and consultation with the trustees of the scheme before the act took place.

Selecting cases for investigation and prosecution

The Regulator states that it will select cases for prosecution being mindful of the policy intent behind the new offences, for example, where:

• the primary purpose of the conduct is 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; and/or
• the trustees, the Regulator and/or the Pension Protection Fund have been misled or not appropriately informed.

It is worth noting that this section of the draft policy also includes that evidence pre-dating commencement of the offences may be relevant to the Regulator’s investigation or prosecution of actions after that date, for example, if it indicates someone’s intention.

In considering whether to prosecute someone, the Regulator will consider: (1) their relationship, duties and proximity to the employer, the scheme, and the act or failure to act; (2) the extent of their involvement or influence; and (3) any direct or indirect benefit the person receives or is entitled to by reason of the act or failure to act.

The Regulator also sets out the types of acts that it has previously encountered that might be considered appropriate for prosecution. These include: the sale of an employer without replacing an existing parental guarantee over the employer’s section 75 debt, resulting in the loss of the guarantee (in circumstances where the trustees were not told about the sale in advance); and the stripping of assets from an employer, which resulted in substantial weakening of the support for the scheme.

Next steps

The consultation closes on 22 April and the Regulator will publish the final policy later in the year.