On September 29, 2021, the Pensions Regulator (tPR) released its long-awaited policy (Politics) on how it intends to exercise its powers in relation to criminal offenses under the Pension Schemes Act 2021 (the Act).
The main conclusion of the policy is that tPR does not intend to prosecute behavior that it considers to be ordinary business activity. As with its “moral hazard” powers, tPR will take a risk-based and proportionate approach.
The policy contains very useful guidance on the “reasonable excuse” defence. There is, however, very little guidance for pension plan administrators that falls within the scope of criminal powers (but which are generally outside the scope of moral hazard powers), a shortcoming that has been identified by many commentators at the stage of consulting.
Of course, any sentencing will be a matter for the courts to decide and tPR has stated that the policy will be reviewed following any court rulings and in accordance with tPR’s experience as new offenses are prosecuted.
A summary of the new criminal offenses
By law, as of October 1, 2021, the following offenses are considered criminal offences:
- any person carrying out an activity having a materially detrimental impact on the benefits of the scheme (tort of property damage). The offense carries the risk of an unlimited fine and up to seven years in prison;
- an act or default by a person to prevent the collection of a debt under section 751 (being the plan deficit measured on the basis that member benefits are guaranteed with an insurance company) (Employer debt tort). A person convicted of this offense could face up to seven years in prison or an unlimited fine.
(Note: A person in the context of these two offenses can be anyone (including the employer, plan trustees and their advisers) unlike tPR’s moral hazard powers which can only be exercised at against an employer participating in the plan or any person connected or associated with the plan (employer);
- non-payment of sums due under a notice of contribution. This offense is punishable by an unlimited fine; and
- provide tPR with materially false or misleading information in relation to prescribed matters. A person found guilty of this offense could be subject to a fine and/or a sentence of up to two years in prison.
Unlike its moral hazard powers (where, for example, a six-year time limit applies for the imposition of a notice of contribution), there is also no time limit on which tPR can prosecute these new offences.
Scope of new penal powers and impact on business activity
Unlike tPR’s anti-avoidance powers, which can be exercised against any employer who participates in the schemes (and companies/persons related or associated with them), criminal sanctions can be taken against any anybody. Trustees (who are generally outside the scope of moral hazard powers), their advisers and even lenders are also affected.
Mergers and acquisitions activity, payment of special dividends, corporate borrowing (particularly where security is given to a lender), solvent and insolvent restructurings, and investment activity could all be affected by the new powers.
The new criminal offenses
The policy sets out the three different “elements” of criminal offences:
- an act element (essentially summarizing the above offences);
- a mental element; and
- the defense of reasonable excuse.
The “mental” elements
Offenses have different mental elements.
- Under the offense of material injury, the mental element of the offense is met if the person intended his act to have the relevant effect.
- The mens rea is met under the offense of employer debt where a person knew or ought to have known, having regard to the circumstances as they existed at the time of the act, that his act would have a material adverse effect on the pension plan.
Defense of reasonable excuse
Even if both the “act” element and the “mental” element are proven, a person will only have committed an offense if he has no reasonable excuse for committing the act.
Although it will ultimately be for the criminal courts to decide (as is the case for the “act” element and the “mental” element), tPR will take into account the following elements when assessing whether there is had a “reasonable excuse”:
- whether the harm to the plan was central to or an incidental consequence of the act or omission;
- the reasons for each person taken individually; for example, where a sponsoring employer extends its loan, the question of whether the bank/lender had a reasonable excuse is not affected when assessing the reasonableness of the actions (unless the parties act together) ;
- the circumstances, i.e. the time constraints a person was under and their own circumstances – for example, if a director has extensive refinancing experience, this may be relevant to their knowledge of potential options and alternatives viable;
- the adequacy of any mitigation measures provided to offset any adverse impacts;
- in the absence of mitigation or in the event of inadequate mitigation, whether there was an alternative available that would have avoided or reduced the adverse impact;
- the extent to which communication and consultation with plan administrators took place prior to the relevant act;
- in the case of any person with fiduciary duties to the plan (i.e. the trustees of the plan), the extent to which they have complied with those obligations; and
- where the person was acting in a professional capacity, whether they acted in accordance with professional duties, obligations of conduct and applicable ethical standards.
The legal burden is on tPR to prove the absence of a reasonable excuse, but tPR pointed out that this does not mean that tPR must identify and disprove every possible excuse open to someone. tPR expects those it investigates to present sufficient evidence of anything that could constitute a reasonable excuse, as evidenced by contemporaneous records, such as meeting minutes, correspondence and written advice.
Business Activity Examples
The policy also contains case studies of corporate activities that may fall under criminal powers. A case study concerns a refinance/secured loan taken out by an employer.
A number of examples are also given for determining whether harm was essential or incidental to the objective. Such an example would be where a sponsoring employer can only afford to pay minimal dividends and its parent company asks the employer to direct new business to a new group company (rather than conduct it through of the employer) and the employer becomes unable to adequately fund the scheme therefore tPR will consider harm to be central to the objective.
The policy gives various scenarios where there was a viable less detrimental alternative to an act or omission. Such an example would be where an employer facing imminent insolvency, whose trustees choose to declare a dividend shortly before appointing trustees and therefore in administration the scheme receives £20 pence, as the do the other unsecured creditors, the directors violated their obligation to take into consideration the interests of all of the company’s creditors. There was a viable alternative of not declaring the dividend, which would have been less detrimental to the pension plan.
However, the cases most notoriously absent from the examples given are the scenarios that pension plan administrators may face. While it is helpful to know that tPR will consider whether trustees have complied with their fiduciary duties, there is no indication of what this means in particular scenarios. For example, if the trustees fail to agree a mitigation for the pension plan with its employer, would failure to promptly notify tPR be considered a breach of their fiduciary duties.
No retroactive effect
The new criminal offenses do not have retroactive effect and tPR can only prosecute acts committed on or after October 1, 2021. The policy states that any act prior to October 1, 2021 may be relevant for investigation or prosecution after that date. date (for example, if it indicates intent). On the other hand, potential targets of tPR criminal investigations or proceedings can also refer to decisions or actions taken before October 1, 2021 to show that they had a reasonable excuse.
Additional Policy Consultations
At the consultation stage, there were calls for the policy to be further contextualized. tPR has therefore published new consultations on three draft policies:
- overlapping jurisdictions: define its approach when it has the possibility of exercising both criminal and/or regulatory jurisdictions in the same set of circumstances;
- an update to its monetary powers policy to impose high fines for information gathering and avoidance-related scenarios; and
- information-gathering power: the use of Section 72 reviews, interviews and inspections in its enforcement cases, including its approach to new fixed and escalating sanction powers for non-compliance. compliance.
The comment period for the above policies closed on December 22, 2021 and tPR’s response is awaited.
Companies that sponsor defined benefit plans should carefully consider the risk of tPR’s new criminal powers being triggered on any corporate activity, particularly in light of the guidance set out in the Policy.
- A debt under section 75 or 75A of the Pensions Act 1995, which is calculated on the assumption that liabilities to all members are secured by the purchase of annuities from a pension company ‘assurance.