Traditionally, the Pensions Regulator's (tPR) powers have not extended to banks and other lenders who make loans to corporate sponsors of defined benefit (DB) schemes. It has been up to the sponsor to ensure that the loan does not materially adversely affect its pension scheme and, if it does, to provide adequate mitigation for the scheme.

A failure by the sponsoring employer to do so could result in the sponsor and companies connected and associated with it1 (and their officers) being subject to an exercise by tPR of its moral hazard powers.

Under these powers, tPR can impose a Contribution Notice (CN) requiring the company and officers responsible to make a payment to the pension scheme to address the detriment.

What is changing for lenders?

The significant change under the Pension Schemes Act 2021 (Act) is that, while it is still the case that the moral hazard powers cannot be exercised against a bank, the new criminal powers are applicable to third parties, including banks and other lenders.

The criminal offence and civil penalties

Under the Act, it is a criminal offence for any person to:

  • engage in activity that has a materially detrimental impact on scheme benefits; or
  • commit an act that prevents a pension scheme from recovering all or any part of the Section 75 Debt2 from the employer with the intention that the act would have that effect.

The offence can be committed by any "person" (regardless of their connection or otherwise with the scheme or its sponsoring employer), other than someone appointed as and acting within their functions as an insolvency practitioner. So, the new offences can apply to individuals, corporate entities and pension scheme trustees as well as their advisers, and banks and other lenders.

The offence carries the risk of an unlimited fine and up to seven years in jail. There is also a civil penalty for the same offence, with a fine of up to £1 million.

For our previous briefing covering the criminal offences and new civil penalties, click here.

TPRs criminal offences policy

On 29 September 2021, tPR issued its criminal offences policy (the Policy) giving guidance as to its approach to investigating and prosecuting the new offences. The Policy sets out the three different "elements" to a criminal offence: (a) an act element; (b) a mental element; and (c) the reasonable excuse defence.

In terms of the reasonable excuse defence, there are three factors that tPR will take into account:

  • the extent to which the detriment to the scheme was an incidental consequence of the act or omission;
  • 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.

So what is the risk to a lender of the Pension Regulator instigating criminal proceedings?

Whilst banks and lenders will need to consider carefully the implications of the new offences when providing financing to sponsors of DB schemes, they may draw comfort from the fact that the Policy emphasises that tPR:

  • will not use these powers in a way that targets ordinary commercial activity; and
  • will adopt a risk-based and proportionate approach.

Only the most serious examples of intentional or reckless conduct will be investigated and prosecuted.

Contained in the Policy is a helpful case study concerning a refinancing by the corporate sponsor of a DB scheme in order to pay off a loan to its parent company. On defaulting on the lender's loan, the lender then called in the administrator to enforce its loan against the sponsor. The example in the Policy then examines the extent to which the various parties, the corporate sponsor, the parent company and the lender may be guilty of a criminal offence.

For banks and lenders, the key takeaway from the Policy (and the case study) is that it appears that tPR's view is that:

  • whilst a lender's decision to call in the administrators (or take other enforcement action) when a sponsor defaults on its loan may satisfy the "act" and "mental" elements of an offence, the lender will generally be well aware that claiming the entirety of the debt, fees and accrued interest could lead to the pension scheme receiving next to nothing in the administration of the employer – the lender will have a reasonable excuse defence available to it;
  • the lender's lack of proximity to the pension scheme means that any adverse consequences for the pension scheme arising out of the lender enforcing its debt are not central to the lender's purpose. The lender is entitled to protect its own interests and claim its debt, and any harm to the pension scheme is merely incidental; and
  • generally speaking, the lender does not owe duties or obligations to the pension scheme or the sponsor.

In the case study given in the Policy, in negotiating the terms of its lending (which were higher than standard market rates), the lender had not acted arbitrarily, and there was no evidence of any lack of honesty or good faith by the lender.

Practical tips for lenders

  • The Policy states that, when considering the availability of the reasonable excuse defence, tPR will also take into account:
    • the extent to which communication and consultation with the trustees of the scheme took place before the "relevant act"; and
    • if there was a (material) detrimental impact on the scheme, the adequacy of any mitigation provided to offset it.

The lender should therefore make enquiries with the borrower as to whether the above steps have or will be taken. If they have, then there is unlikely to have been any detriment to the scheme so as to give rise to a criminal offence (whether by the borrower or the lender).

  • The terms of the financing should be revised carefully so that they reflect any risk to the lender of tPR exercising its criminal powers (or imposing a civil penalty) against the borrower and the moral hazard powers (as amended by the Act). In particular, any notification obligations on the borrower and any "event of default" should cover criminal proceedings instigated by tPR against the borrower and a CN imposed under the new grounds for the imposition of a CN introduced by the Act.

Borrower concerns

By contrast, there are potentially greater pitfalls for a borrower. Not only will a sponsor of a DB scheme be within the scope of the new criminal powers, under the Act there are two new grounds for the imposition of a CN:

  • the employer insolvency test: this looks at whether, on an insolvency of any company participating in the pension scheme, the amount of any Section 75 Debt that the scheme would have recovered would have materially reduced as a consequence of any loan/financing; and
  • the employer resources test: this test looks at whether the company's "resources", being its profits before tax, are materially adversely affected by the loan/financing.

A statutory defence is available against an exercise by tPR of its powers. A borrower would need to show that it gave due consideration as to whether or not entering into the financing would cause material detriment and:

  • have reasonably concluded that it would not; or
  • that it took all reasonable steps to eliminate or minimise the anticipated material detriment before reaching that conclusion.

This is very similar to the considerations that tPR will take into account when considering whether a reasonable excuse defence is available in the context of its criminal powers.

Practical steps for the borrower

  • A borrower should consider carefully the risk of any financing triggering the exercise of tPR's moral hazard/criminal and civil powers, obtaining financial/covenant advice (as well as legal advice) as necessary.
  • In particular, in view of the new criminal powers, it would be good practice for the borrower to consider informing the scheme trustees before, rather than after, a formal decision is made to put any financing into place.
  • Where there is likely material detriment to the scheme, a borrower should consider whether the financing may be structured differently. For instance, could the loan (and any security granted) be taken by another company in the group, rather than the employer participating in the scheme?
  • Alternatively, mitigation should be provided to the scheme to address the detriment. Mitigation can take various forms, such as providing additional cash for the pension scheme, funds placed in an escrow account (for the benefit of the scheme) or a parent company guarantee in respect of the Section 75 Debt liability.

Notification of security to the lender

Under draft regulations under the Act, it is expected that the granting or extending of a "relevant security" would be notifiable to tPR. "Relevant security" for these purposes is a security comprising more than 25% of either the company's consolidated revenue or its gross assets. If these regulations are brought into force as currently intended, any financing that involves the granting or extension of a relevant security will need to be notified to tPR. The notification will also need to be accompanied by a statement providing information to tPR and the trustees of the pension scheme which describes, amongst other things, any adverse effects of the security on the pension scheme and any steps taken to mitigate those adverse effects.


Although the new criminal powers under the Act are potentially serious, with proper planning and careful consideration of the implications for the pension scheme, lenders and borrowers can enter into financing and refinancing transactions securely without falling foul of the powers