The Pensions Regulator (the Regulator) has published for consultation its draft policy guidance outlining its approach to investigating and prosecuting the new criminal offences provided for in the Pension Schemes Act 2021 (the Act).
Scope of the draft policy and offences
The Regulator’s draft policy guidance (the Guidance) sets out the Regulator’s interpretation of its new powers under the Act and provides practical examples of behaviours which would likely be caught by the new criminal offences. The Regulator has emphasised that other prosecuting powers (for example the Director of Public Prosecutions and the Secretary of State) will not be bound by the Guidance. Nevertheless, it is anticipated that other prosecuting bodies will consult the Regulator before commencing any criminal proceedings.
The ambit of the two new criminal offences is wide and the consequences potentially severe. The offences can apply both to individuals and corporate entities, carrying a potential seven-year prison term and/or an unlimited fine. Advisors, lawyers, investment managers and lenders could also all be caught by the offence notably, under secondary liability, if they help or encourage the commission of offences. The detail of the Guidance is important in helping all affected parties recognise the types of behaviours which could be captured by the offences, particularly given that there are no limitation periods for either of the offences.
The new criminal offences
The two new key criminal offences introduced by the Act are currently expected to come into force in the Autumn of 2021. However, the Regulator has made it clear that they may consider evidence pre-dating the commencement date where relevant to the prosecution, for example if it indicates a potential target’s intention.
Both new criminal offences can be committed either by a positive act or a failure to act and liability can also extend to a person who helps or encourages the person who commits the offence. The offences do not extend to an appointed insolvency practitioner who acts in accordance with their functions. The Regulator has noted that in most cases, an advisor who was acting in accordance with their professional duties, conduct obligations and ethical standards is likely to have a reasonable excuse (see further below).
The offence of avoidance of employer debt.
A person commits this offence if they do an act or engage in a course of conduct which:
- prevents the pension scheme from recovering all or any part of its debt due under s.75 of the Pensions Act 1995 (the “s.75 debt” which is based on the insurance market value of the pensions obligations);
- prevents a s.75 debt becoming due;
- compromises or settles a s.75 debt; or
- reduces the amount of any s.75 debt otherwise due.
The person must have intended their actions to have this effect and they must have acted without a reasonable excuse.
The offence of risking accrued scheme benefits.
A person commits this offence if they do an act or engage in a course of conduct which detrimentally affects in a material way the likelihood of accrued scheme benefits being received.
The offence may be committed if the person knew or ought to have known that what they were doing would have such an effect and must have acted without a reasonable excuse.
Comparison with existing powers to issue contribution notices
The Regulator’s new prosecuting powers add to its existing powers to issue contribution notices which require a target to make a cash payment to be made to the pension scheme in circumstances set out in legislation. The intention is to deter conduct that is already broadly within the scope of contribution notices.
The main differences between the Regulator’s existing contribution notice powers (The Act introduces two further bases for issuing contribution notices which are expected to come into force in the Autumn of 2021) and the new criminal offences are summarised in this table.
The Regulator has confirmed that it will interpret intent for the purposes of the offence of avoidance of employer debt in the same way as it interprets ‘main purpose or one of the main purposes’ when considering existing powers to issue contribution notices for avoidance of employer debts (s.38 of the Pensions Act 2004). Additionally, any analysis of material detriment will likely be considered by the Regulator in the same way as for contribution notices.
The reasonable excuse defence
Under both new criminal offences, the burden is on the prosecution to determine that the person had no reasonable excuse. The Regulator, however, does not expect that it will be required to identify and disprove every potential excuse open to a person. The Guidance notes that the Regulator will expect those it investigates to put forward an explanation for their conduct and provide sufficient evidence from contemporaneous records to establish a reasonable excuse. It will therefore be essential to keep clear records, for example any meeting minutes, all relevant correspondence and written advice.
What amounts to a reasonable excuse?
The Guidance states that the Regulator will take into consideration three key factors when determining whether a reasonable excuse exists in any given case:
1. Whether the likelihood of full scheme benefits not being received was incidental to the person's act or failure to act, or whether the detrimental impact was a fundamentally necessary step to achieving the person's purpose.
The Guidance provides the following examples as situations where the material detriment is considered to be incidental to the person’s act, and therefore situations where a reasonable excuse is more likely to be established:
- a party at arm’s length from the employer, through ordinary business activity, terminates a business relationship or a lending arrangement for reasons which are unrelated to the pension scheme; or
- a trade union disrupts the employer’s business while representing the interests of employees.
An example of where a reasonable excuse defence is unlikely to succeed is where:
- a key supplier terminates a supply contract with the employer;
- the aim of doing so was to trigger an insolvency; and
- the employer’s business is acquired by the supplier separately from the scheme liabilities.
2. Whether there was adequate mitigation provided to offset any detrimental impact.
The Guidance provides the following examples as situations where the Regulator may determine that there was adequate mitigation, and therefore situations where a reasonable excuse is more likely to be established.
- An employer is sold, and its existing covenant support arrangements are terminated. However, to mitigate this, part of the sale proceeds is paid into the scheme and the new employer compensates the scheme for the loss of the seller group support.
- An employer makes cash transfers to a treasury company within its wider group, but to mitigate this, the employer is given an enforceable right to demand repayment at any time. Therefore, despite the transfer, the scheme’s funding position remains strong.
3. Whether there was a viable alternative which would have avoided or reduced the detrimental impact in a scenario where mitigation did not exist or were not adequate.
The Guidance provides the following examples as situations where the Regulator may determine that there was no viable alternative and therefore situations where a reasonable excuse is more likely to be established.
- An employer raises debt which has prior ranking security than the pension scheme, or with higher interest rates payable than conventional debt. However, the debt is essential for the survival of the business and it is considered that there is no alternative other than insolvency.
- An employer faces a liquidity crisis and increases its unsecured facilities by approaching its lending syndicate. The members of the lending syndicate (who are capable of being liable under the offences) refuse to lend further money, triggering an insolvency process. The Regulator would not expect the lender to continue lending if it were materially against their interest to do so.
The Regulator may also consider the following when deciding whether to begin or continue a criminal investigation:
- the extent of any communication and consultation with the trustees prior to the act/failure to act;
- compliance with statutory duties to notify the Regulator of events affecting the scheme; and
- the level of transparency and timeliness of any engagement with the Regulator.
Wide and uncertain
Some of the challenges relating to the new offences under the Act are that they are wide and uncertain both as to the conduct that may be criminal and as to the intent or knowledge required.
Is it sufficient to know there could be adverse consequences for the pension scheme? When can a person be convicted for what they should have known but did not actually know?
Perhaps even less clear is what might constitute a reasonable excuse. Will lawful enforcement of existing rights provide a reasonable excuse? Will an unrelated commercial purpose provide a reasonable excuse or must there be a defensive purpose? Can a person have a reasonable excuse without fully mitigating harm to the pension scheme? Can it be sufficient to comply with legal obligations?
The potential secondary liability for advisers may make it difficult to get full advice. Will the duty to give full advice and act in the client’s interest or in accordance with instructions provide a reasonable excuse? May an advisor have a reasonable excuse even where the client does not?
The Regulator’s Guidance goes some way towards clarifying its own proposed approach to these issues. However, since it cannot tie its own hands, it is perhaps understandable that the Guidance provides only limited answers. Indeed, David Fairs, Executive Director of Regulatory Policy Analysis and Advice at the Regulator, has made it clear that the Guidance will evolve depending on court decisions, industry experience and the Regulator’s experience.
The Act arguably makes any knowing participation in an otherwise lawful transaction a serious criminal offence if it could weaken a pension scheme’s future funding or reduce recovery of a s.75 debt on employer insolvency, unless a “reasonable excuse” is provided - even where there is no current obligation to fund to a s.75 debt level and even though third parties have no duties to the scheme at all. Yet, the Government’s intent is stated as only to “tackle those who try to plunder the pension pots of hard-working employees” by ensuring “prison for pension pot pinchers” and to “deter reckless bosses from running schemes into the ground”.
There is a gap to bridge. It may be too much for Regulator Guidance to reconcile the two.
The Guidance is open to consultation until 22 April 2021, following which the Regulator is expected to publish their final policy guidance later in the year.