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New criminal offences – The Pensions Regulator’s policy

Retirement|Pension Board and Trustee Consulting|Pensions Corporate Consulting

March 12, 2021

Pensions Regulator outlines its policy on the use of its powers to impose a prison sentence and/or an unlimited fine on those found guilty of abandoning obligations under defined benefit schemes.

On 11 March 2021, the Pensions Regulator (TPR) published a short consultation document on its policy concerning the new criminal offences under the Pension Schemes Act 2021 (the Act). Any feedback should be provided to TPR by 22 April.

The accompanying draft policy document sets out guidance on TPR’s general approach for investigation and prosecution in relation to the new offences, and provides examples of actions or behaviours that could be in scope. The breadth of individuals or entities (referred to as ‘person’ hereafter) that are in scope is extremely wide, and can include certain service providers – such as lawyer, actuary, accountant and investment manager. While the introduction of the offences is not expected to change the behaviour that TPR will investigate, they mark a significant strengthening of the powers available to it.

In brief, two new criminal offences under the Act – carrying the potential of a seven-year prison term and/or an unlimited fine – are:

  • Avoiding an employer debt
  • Causing material detriment to the likelihood of accrued scheme benefits being received.

In both cases, TPR has to prove that the person had intent or “knew or ought to have known that what they were doing would have this effect”. Even then, the powers will be used only if the person does not have a reasonable excuse. The courts will ultimately decide the boundaries for the exercise of TPR’s powers and what is or is not a reasonable excuse.

Moral hazard powers

The policy document compares the new versus the existing ‘moral hazard’ powers. For example, TPR’s current powers can be used only against a scheme sponsor or someone connected or associated with them, whereas its new powers can target anyone except for an insolvency practitioner acting in that capacity. Specifically, its new powers can be exercised against someone who “aids, abets, counsels or [helps/encourages] another person” in relation to an act or omission.

The burden of proof for some aspects is also different. Under the existing powers, a target would need to establish the statutory defence – that they gave due consideration and reasonably concluded that their action would not cause material detriment, or they took all reasonable steps to minimise that detriment. Under the new powers, it would be for TPR to prove that the person knew or ought to have known that their action would cause material detriment.

TPR’s new powers would apply only in cases where a debt had become due, whereas its existing powers also cover scenarios where a debt might become due. There is also a six-year limitation period in relation to TPR’s existing powers and no limitation period in relation to the new ones.

Determining material detriment

According to the policy document, TPR will determine material detriment in the same way as for its existing moral hazard powers and will consider what parties “knew or ought to have known” at the time of the act or omission. It will not seek to consider subsequent events with the benefit of hindsight.

When considering whether actions were reasonable, TPR emphasises the importance of considering contemporaneous records (eg minutes and written advice) and states that it will consider three factors:

  • Whether the detrimental effect was incidental to the act
  • The adequacy of any mitigation
  • Where no or inadequate mitigation is given, whether a viable alternative was available.

TPR gives some examples in the policy document. For instance, termination of a relationship by a supplier would be incidental – unless the intention was to drive the sponsor into insolvency in order to purchase the assets of the business cheaply. Also, giving no or inadequate mitigation could include a case where a sponsor approaches its lenders in a liquidity crunch and the lenders decline to extend further facilities because they consider it counter to their interests – in the vernacular, throwing good money after bad.

Clearance and selecting cases for investigation and prosecution

TPR also makes it clear that there will be no clearance procedure for the new offences but summarises the general factors that make sanction more likely than not; these are where:

  • The primary purpose is established to be scheme abandonment
  • A person has made significant financial gain to the detriment of the scheme
  • There is some other unfairness
  • Trustees, TPR or the Pension Protection Fund are misled or not appropriately informed.

Finally, TPR also states that evidence pre-dating the effective date of the powers under the Act being brought into force – expected to be 1 October 2021 – may be relevant.

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