New Criminal Offences – Pensions Regulator’s Approach
The Pensions Regulator has published its guidance on its approach to the investigation and prosecution of the new criminal offences which came into force on 1 October 2021.
Such powers are in addition to the Pensions Regulator’s pre-existing powers to issue contribution notices to employers who sponsored a scheme at the relevant time, or a person connected with that employer for similar offences. Will they make a difference? Will they result in a change of behaviour? Time will of course be the ultimate judge. The Regulator has a range of powers under the Pensions Act 2004 most of which have never been used. Some are occasionally threatened or have even initially been pursued, only for the process to be stopped several years and several millions of pounds later. Some may argue of course that this is why new powers are needed.
The new criminal offences
The Pension Schemes Act 2021 amended the Pensions Act 2004 by inserting new criminal offences:
Offence of avoidance of employer debt (new section 58A Pensions Act 2004)
The person does an act or engages in a course of conduct that:
- Prevents the scheme from recovering all or any part of the debt that is due from the employer under section 75 of the Pensions Act 1995;
- Prevents such a debt becoming due;
- Compromises or otherwise settles such a debt; or
- Reduces the amount of such a debt that would otherwise become due.
The person must have intended the act or course of conduct to have such an effect.
Offence of conduct risking accrued scheme benefits (new section 58B Pensions Act 2004)
The person does an act or engages 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).
The person must have known or ought to have known that the act or course of conduct would have that effect.
In relation to both offences
- Proceedings may be instituted by the Pensions Regulator and a person guilty of either offence is potentially liable to a fine and/or to imprisonment for a term not exceeding seven years.
- The offences are not limited to employers and can effectively be committed by anyone, save for insolvency practitioners who are excluded.
- However - a person will not be guilty of either offence if they have a reasonable excuse for doing the act or engaging in the course of conduct.
- And - the offences are not brought into force retrospectively, so only acts after 1 October 2021 can be prosecuted.
The Pensions Regulator’s Approach
Interpretation of reasonable excuse
As part of considering whether to prosecute, where the ‘act element’ and ‘mental element’ is present, the Pensions Regulator would take into account whether there may be a reasonable excuse, on the basis of the following three factors:
- 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.
- Where no, or inadequate, mitigation was provided, whether there was a viable alternative that would have avoided or reduced the detrimental impact.
Other factors the Pensions Regulator identifies include the extent of communication with the trustees prior to the action, whether actions were compliant with fiduciary duties and professional duties where that is relevant.
Process for selecting cases for prosecution
If a case is brought to the Pensions Regulator’s attention - for example by a whistleblower, a member complaint or what the Regulator calls “our intelligence function” which might just mean reading the press - it will carry out a risk assessment looking at the funding level of the scheme and behaviour involved as well as internal considerations of available resources.
If the Pensions Regulator decides to take action, as there are some overlapping powers, it will need to decide whether the use of criminal powers is appropriate. Some of the factors that the Pensions Regulator considers relevant to this are whether:
- There is serious harm to the scheme and members as a consequence of the act;
- The person had extensive involvement or influence in the harm caused;
- Significant financial gains have been made to the detriment of the scheme;
- There has been some other unfairness in the treatment of the scheme; or
- The trustees have been misled, or there has been a lack of openness with the Pensions Regulator.
What effect will these new offences have in practice?
From now on those involved in corporate restructurings and transactions that may detrimentally impact a defined benefit scheme will need to carefully assess whether and how they might be affected by the new powers. They will need to consider the impact of the transaction on the pension scheme, how any detrimental impact can be avoided or mitigated and whether there is a reasonable basis for their actions. Comprehensive records covering the decision-making processes will be particularly important - in case the Regulator comes knocking.
There is no doubt that the new offences are broadly drafted and potentially may catch a wide range of activities, though the Regulator states that it is not intending to prosecute ordinary commercial activity. As ever, how the Pensions Regulator seeks to utilise its powers and applies its guidance will be critical in determining the efficacy of the new provisions. Over time how the Regulator interprets “ordinary commercial activities” will become clear. Until then, there is a new risk with corporate transactions where a defined benefit scheme is involved. No one wants to be a test case.
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