The Pension Schemes Act 2021 (PSA) received Royal Assent on 11 February 2021 and introduces new criminal offences, financial penalties and regulatory sanctions to strengthen the funding and security of defined benefit (DB) schemes.
New Criminal Offences
From 1 October 2021, any party to corporate activity that jeopardises a DB scheme may face criminal prosecution under new provisions of the Pensions Act 2004 (PA):
- Avoidance of employer debt (section 58A, PA)
A criminal offence will be committed where a person does an act or omission or engages in a course of conduct that intentionally prevents the recovery or the coming due of, compromises or settles an employer debt or reduces the amount of an employer debt and did not have a reasonable excuse for doing so.
- Conduct risking accrued scheme benefits (section 58B, PA)
A criminal offence will be committed where a person does an act or omission or engages in a course of conduct that detrimentally affects, in any material way, the likelihood of accrued benefits being received, where that person knew or ought to have known that their conduct would have that effect, and has no reasonable excuse.
These offences are punishable by an unlimited fine and/or up to seven years’ imprisonment.
The Policy Guidance
Given the wide scope of the offences, a wide range of corporate activities could potentially cause a material detriment to a DB scheme, and the lack of carve outs means that any person (including other group companies and its directors, as well as investors, lenders, scheme trustees and advisors) involved in the relevant act could be caught by the offence (other than insolvency practitioners acting in that capacity).
All parties to a corporate activity will need to consider whether that activity poses a risk to the DB scheme or avoids an employer debt and, if it does, each party will need have a “reasonable excuse” for the act.
The Regulator published a policy on 29 September 2021 on the investigation and prosecution of the new criminal offences and the assessment of a “reasonable excuse”.
The policy states that whether a person has a reasonable excuse is ultimately a matter for the criminal courts, but that as part of their investigation, the Regulator must form their own view on whether a person had an objectively reasonable excuse for acting as they did.
The Regulator specifies three factors that will generally be significant in their assessment of a reasonable excuse:
- the extent to which the detriment to the DB scheme was an incidental consequence of an 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.
The Regulator will also take into account:
- each person’s reasons for acting in the way that they did, and the reasonableness of those reasons;
- the circumstances in which the act took place;
- the person’s own circumstances, including their duties, skills and experience and other relevant attributes; and
- the extent of communication and consultation with the scheme trustees and/or the Regulator before the act.
Financial Penalties
From 1 October 2021, there are also two new civil penalties whereby the Regulator may impose a fine of up to £1 million on persons who are party to either of the criminal offences listed above.
The Regulator will also be able to impose a fine of up to £1 million where a person:
- knowingly or recklessly provides false or misleading information to the Regulator or the scheme trustees;
- fails to report a notifiable event to the Regulator, without a reasonable excuse;
- fails to submit a notification and “accompanying statement” in respect of a material corporate transaction or the granting of security; or
- fails to comply with a contribution notice, without a reasonable excuse.
Corporate Transaction Notifications
On the 8 September 2021, the Government launched a consultation on proposals to introduce an expanded and enhanced notifiable events regime providing for additional notifiable events and additional information to be provided in certain cases.
It is expected that the new reporting requirements will come into force on 6 April 2022. Under the revised events regime, scheme sponsors (and those associated or connected with the scheme sponsor) must give early notice to the Regulator (and the scheme trustees) when a “decision in principle” is made in relation to certain key corporate transactions, including:
- sale of a material portion of the sponsor’s business or assets;
- granting security over assets above a certain value in priority to the scheme; and
- certain corporate restructuring.
Failure to comply with the notifiable events regime will allow the Regulator to impose a civil penalty of up to £1 million.
The expected implication of the new notifiable events regime is that scheme sponsors will be required to notify the Regulator and the scheme trustees about these transactions at a much earlier stage.
Contribution Notices
Where there is a material detriment to a DB scheme or the avoidance of an employer debt, the Regulator may issue a contribution notice to a scheme sponsor or a person connected or associated to the scheme sponsor requiring them to make an immediate payment to the DB scheme.
From 1 October 2021, two new grounds for the Regulator to issue a contribution notice were introduced:
- where an act (or omission) satisfies the “employer insolvency test”
This is where a relevant act or omission would have materially reduced the amount a DB scheme would stand to recover on the hypothetical insolvency of a scheme sponsor.
- where an act (or omission) satisfies the “employer resources test”
This is where a relevant act or omission reduced the value of the resources of a scheme sponsor to a material extent relative to the amount of the estimated employer debt.
These new grounds are employer focused, rather than scheme focused and are intended to make it easier for the Regulator to issue a contribution notice. The Regulator must still show that it is reasonable to issue a contribution notice in the relevant circumstances and there is now an additional factor that it must take into account when determining reasonableness: the effect of the act or omission on the value of scheme assets or liabilities.
Failure to comply with a contribution notice will allow the Regulator to impose a civil penalty of up to £1 million. Non-compliance is also a criminal offence punishable by an unlimited fine.
Practical Implications
Given the wide scope of the new offences, penalties and sanctions, it is crucial for borrowers, lenders and stakeholders involved in corporate transactions that may negatively affect a DB scheme to proceed with caution when entering into such transactions.
All parties should consider:
- the likely effect of the transaction on the DB scheme and whether the new offences, penalties and/or sanctions are likely to be triggered;
- how any material detrimental impact can be avoided or mitigated;
- whether they have a reasonable excuse for their actions or omissions; and
- sharing relevant information as soon as possible with the scheme trustees and the Regulator.
The Regulator operates a clearance process pursuant to which it can confirm that it will not issue a contribution notice or a financial support direction in relation to a proposed transaction. All parties should consider whether it is appropriate to make an application for clearance from the Regulator in such circumstances.
Clearance is not available for the new offences but scheme sponsors may use the clearance process to provide a clear indication of a reasonable excuse for the new offences.
The Policy guidance states that the Regulator expects those it investigates to explain their actions and put forward sufficient evidence of any matters from contemporaneous records that might amount to a reasonable excuse, including:
- minutes of meetings;
- correspondence (between the person and the scheme trustees and/or the Regulator); and
- written advice.
For more information, please contact Samantha Lang or your usual banking contact.
