With just two days to go before the relevant provisions of the Pension Schemes Act 2021 (the Act) come into force on 1 October 2021, the Pensions Regulator (the Regulator) has published its long-awaited criminal offences policy, which provides guidance on the Regulator’s approach to the investigation and prosecution of the new criminal offences introduced by the Act. In addition, the Regulator has updated its Code of Practice on contribution notices (the Code) and related guidance, which look at the circumstances in which the Regulator’s existing and new contribution notice powers will be engaged. Alongside the criminal offences policy and updated Code, the Regulator has also published a consultation on three further draft policies on overlapping powers, monetary penalty powers and information gathering powers.
This blog summarises the key points employers and trustees should be aware of in relation to these new documents.
The Act introduces wide new criminal offences which will impact corporate and distressed activity involving groups with UK defined benefit pension schemes. The two key criminal offences apply where any person acts in a way which: (a) intentionally avoids an employer debt to the scheme (‘avoidance of employer debt’); or (b) they knew or ought to have known would have a materially detrimental impact on the security of scheme benefits (‘risking accrued scheme benefits’), in each case without having a reasonable excuse. Both offences carry a maximum penalty of unlimited fines and/or seven years in prison.
Following the issuance of draft guidance for consultation in March 2021, the Regulator has now published its finalised criminal offences policy, setting out how it expects to use the new criminal offences. Following a total of 49 consultation responses, the finalised policy has helpfully addressed some of the concerns raised during the consultation (see our previous blog posts here and here) by providing more detailed case studies and examples, but is largely the same as the draft guidance in substance. Of particular note, the finalised criminal offences policy confirms the following points.
- The Regulator considers that the vast majority of people should not be concerned by the new criminal offences. The Regulator does not intend to prosecute behaviour which “it considers” to be ordinary commercial activity. Instead, the Regulator will investigate and prosecute the most serious examples of intentional or reckless conduct that were already in the scope of their contribution notice power (see our previous blog post here), in particular taking account of the Code and the accompanying guidance.
- The new criminal offences come into force on 1 October and do not have retrospective effect. However, the Regulator may take into account facts from before that date as part of its investigations. In practice, it may be very difficult for the Regulator to completely ignore the impact of hindsight when deciding whether to prosecute.
- When considering whether a person had a reasonable excuse (which is ultimately a matter for the criminal courts but which the Regulator will also determine during its investigation), the Regulator will: (a) consider each person’s reasons for acting in the way they did and the reasonableness of those reasons; (b) take account of the circumstances in which the act took place, for example if there were time constraints; and (c) take account of the person’s own circumstances, duties, skills and experience.
- The three factors to consider when determining whether there is a reasonable excuse have not changed substantially since the draft guidance (see our previous blog post here), with the emphasis being on adequate mitigation being provided to address the impact of corporate and restructuring actions on a pension scheme or, where such mitigation is not provided, whether there is any viable alternative to the relevant action. Additional factors may also be considered, including communication with scheme trustees, compliance with fiduciary duties, and acting in accordance with professional duties. The new criminal offences policy provides numerous examples to demonstrate the application of these factors to particular scenarios.
- There is no ability to grant clearance in relation to the new criminal offences. If clearance is granted in respect of an upcoming transaction, that will not automatically mean that the person has a reasonable excuse for the purposes of the offences, but the mitigation described in the clearance application may be relied upon for the basis of arguing that there is a reasonable excuse.
The Regulator is to be commended for taking the feedback received from the consultation process seriously and making real, and successful, efforts to improve the final version of the policy. However, it remains the case that the policy can only go so far in addressing concerns raised about the breadth of the criminal offences when the Act was passing through Parliament. In particular:
- It is important to note that the finalised criminal offences policy has no statutory effect and will not bind the Regulator to act in a particular way.
- Ultimately, despite the increased number of case studies and examples, the wording of the policy remains intentionally vague, giving the Regulator a wide discretion.
- The policy remains a Regulator-only policy and does not give comfort as to how the other potential prosecutors under the Act (including the Secretary of State and DPP) might approach the criminal offences.
Code of Practice on contribution notices
In addition to the new criminal offences, the Act introduces two new limbs for imposing contribution notices under the Regulator’s ‘moral hazard’ powers. Under the new limbs, the Regulator will be able to issue a contribution notice where it considers that an act or failure to act: (a) materially reduced the debt likely to be recovered from the employer in the event of an immediate insolvency (the ‘employer insolvency’ test); or (b) reduced the resources of the employer in a manner which was material when compared to the buy-out deficit of the pension scheme (the ‘employer resources’ test) (see our previous blog post here).
The Regulator has finalised its revised Code following a six-week consultation earlier this year. The Code includes examples of when the Regulator would expect to issue a contribution notice if it is of the opinion that one or more of the contribution notice tests are met. These examples include:
- where sponsor support is removed, substantially reduced or becomes nominal (any of the tests);
- weakening of the scheme’s creditor position (material detriment and/or employer insolvency tests);
- ‘some instances’ of paying a dividend or a return of capital by the sponsoring employer (any of the tests); and
- payments favouring other creditors of the employer over the scheme where no such sums are then due to those creditors (any of the tests).
With the exception of the first example, the examples given are extremely generic and capture a very wide range of circumstances without giving any substantive guidance on:
- the approach that the Regulator will take to applying the new tests (including the areas in the threshold tests which fall to be determined by the Regulator); or
- the Regulator’s approach to “reasonableness” where the tests are triggered (which will be particularly important in the context of the new tests as these will be triggered more often).
Similarly, the Code-related guidance provides only simplistic illustrative examples of how the tests might be applied in practice, and reasonableness is not addressed in the Code itself.
Whilst the Regulator has updated some of the illustrative examples in the guidance, the revised Code remains much the same. The Regulator has not provided any further examples or guidance on how the tests will be applied, or materiality assessments made, in practice despite calls from respondents. However, the Regulator does say that it will provide more practical guidance on the use of its contribution notice powers ‘in future’ and the updated Code will be finalised in a new ‘single code’ format later in the year.
In the meantime, the Code provides little direction to enable parties to understand how the Regulator will apply the tests or is likely to approach the exercise of its powers.
Consultation on new enforcement policies
In addition to the above, the consultation responses on the new criminal offences made clear that it would be helpful to put the criminal powers into context. Therefore, the Regulator has published a new consultation that contains three draft policies which explain its proposed approach to:
- overlapping powers – where the Regulator has the option to pursue both criminal and/or regulatory powers in respect of the same set of circumstances;
- monetary penalty powers – the ability to impose high fines related to information requirements and avoidance related scenarios; and
- information gathering powers – the use of “section 72 notices”, the new interview power and broader inspection power, in the context of enforcement cases, including the Regulator’s approach to the new fixed and escalating penalty powers for non-compliance.
This draft policy sets out situations where both regulatory and criminal powers may be available to the Regulator. When choosing between its powers, the Regulator will take into account the nature and effect of each of the powers and the outcome use of each might achieve. The draft policy also explains the Regulator’s intended approach to other types of behaviour, including breaches of legislation, directions or restrictions and provides case examples.
The Regulator has the power to issue a financial penalty of up to £1m in certain circumstances. This draft policy provides information on how the Regulator intends to approach these types of penalties, including setting out a proposed penalty banding for certain types of behaviour depending on the person’s level of culpability and the harm caused, and providing example aggravating and mitigating factors to consider when determining which band the penalty falls in.
Information gathering powers
The Regulator’s investigations involve making enquiries to gather relevant information and evidence. This draft policy sets out the types of information the Regulator might ask for, including trustee meeting minutes, board resolutions and minutes, bank statements, correspondence and advice. It goes on to explain the types of information gathering options available to the Regulator, including the power to compel people to answer questions and to enter premises to conduct an inspection, and the circumstances in which the Regulator might use those powers. The final section of the draft policy explains the range of enforcement options available to the Regulator where a person fails to comply with its information gathering powers, including financial penalties and criminal prosecution.
The consultation on new enforcement policies closes on 22 December and the Regulator plans to finalise these policies early in the new year.