A Brief Guide for Corporate Lawyers – The Pension Regulator’s Approach to Investigation and Prosecution of New Criminal Offences

8 April 2021 | Gary Cullen

What is the Pensions Scheme Act 2021?

The Pension Schemes Act 2021 strengthens the powers of the Pensions Regulator and creates two new criminal offences that are due to come into force later in 2021 (possibly October). It will take effect once the Pensions Regulator has consulted with the industry on its draft policy, which was published in March 2021.

Why is it important for lawyers to take note?

It’s essential that corporate lawyers are aware of the Pensions Schemes Act 2021 and how it can affect their clients to ensure they and their clients aren’t unknowingly in breach of the Act, which could mean being punished with imprisonment or unlimited fines.

The purpose of criminalising certain conduct is to tackle more serious intentional or reckless conduct that puts defined benefit pension schemes at risk. The draft policy sets out the Pensions Regulator’s approach to the investigation and prosecution of new criminal offences. Consultation with feedback on the policy will be provided to the Pensions Regulator by 22nd April 2021.

Contribution notices and financial support directions can be issued by the Pensions Regulator to sponsoring employers and associated parties to make payment to the pensions scheme up to the section 75 annuity buy-out deficit. The Government has advised that the new criminal liability will only apply to conduct, which happens after the new powers come into force, although conduct before then could still be relevant in establishing parties’ intentions.

What are the new offences?

Under section 58(A)(2) of the Pensions Act 2004 introduced by the Pension Schemes Act 2021, the offence of avoidance of employer debt is committed if they:

  1. Do an act or engage in a course of conduct that:
    • Prevents the pension scheme from recovering all or part of the debt that is due from the employer under section 75 Pensions Act 1995
    • Prevents the debt becoming due
    • Compromises or otherwise settles that debt, or
    • Reduces the amount of that debt which would otherwise become due
  2. They intended their actions to have this effect, and
  3. They did not have a reasonable excuse for doing the act or engaging in the course of conduct.

Under section 58(B)(2) the offence is committed if:

  1. They act or engage in a course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits being received (whether or not the benefits are to be received under the scheme), and
  2. They knew or ought to have known that what they were doing would have that effect, and
  3. They did not have a reasonable excuse

What are the new criminal penalties?

  • Imprisonment for up to 7 years and/or
  • Unlimited fine

What does the Pensions Regulator need to prove?

The Pensions Regulator needs to show the person knew or ought to have known that what they were doing would have this effect or had intent. The person would be excused if the party had a reasonable excuse. The prosecution has to prove the absence of a reasonable excuse. In time, the Courts will decide what is or is not a reasonable excuse.

The Pensions Regulator states in its draft policy document that it expects those investigated to explain their actions and put forward evidence of matters amounting to a reasonable excuse. The Regulator wishes to see contemporaneous records such as correspondence, written advice, minutes of meetings. The Regulator refers to three factors to determine whether or not there is a reasonable excuse:

  • The adequacy of any mitigation provided to offset the detrimental impact
  • 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; and
  • Where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact.

Who can be caught under the Pension Regulator’s extended powers?

At present, the Regulator’s powers only extend against the pension scheme sponsors or someone associated or connected to them. Under the new regime, the Pensions Regulator can go after everyone else including the lawyer, actuary, accountant, save for the insolvency practitioner.

Falling within the recipients of the Regulator’s new powers are anyone who aids, abets, counsels or helps another person in relation to the act or omission.

The Regulator would need to demonstrate that any of these people know or ought to have known that their action would cause material detriment. Under the new powers, there is no limitation period, whereas under the existing powers the Regulator has to issue a contribution notice within 6 years.

Can Clearance be obtained from the Pensions Regulator?

Clearance can be obtained from the Regulator against a contribution notice or financial support direction being made under section 42 of the Pensions Act 2004. However, section 42 does not apply to criminal offences under sections 58A and 58B. Corporate lawyers should seek advice on corporate transactions, so they can avoid the transaction being a case selected by the Pensions Regulator for investigation and prosecution.

What factors should corporate lawyers consider on a corporate transaction involving a defined benefit pension scheme?

The four key factors to consider:

  • Are substantial financial gains being made to the detriment of the defined benefit pension scheme through, for example, the stripping of assets resulting in reduced support for the pension scheme
  • Is there some other unfairness in the treatment of the pension scheme on the transaction, for example, the loss of a parental company guarantee over the employer’s section 75 debt?
  • Have the pension scheme trustees, Pensions Regulator or the Pension Protection Fund, been misled?
  • Is the main purpose of the transaction the abandonment of the defined benefit pension scheme i.e. extraction of value from the company with no investment into the business and mismanagement?

To find out more information, or to seek advice about the Pensions Scheme Act 2021 and how it could affect your clients, please get in touch. We provide a variety of services through our CORRIDOR offering that could expand your services. To see more about our CORRIDOR service offering, click here.

The author

Gary Cullen
Partner
Pensions Law
D: +44 (0) 207 036 8398
T: +44 (0) 203 051 5711
F: +44 (0) 203 051 5712

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Key Pensions Issues for Corporate Lawyers – Part 4
27 May 2021
Key Pensions Issues for Corporate Lawyers – Part 3
26 May 2021
Key Pensions Issues for Corporate Lawyers – Part 2
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