Pension Schemes Act 2021: The new criminal offences and their potential impact on restructuring transactions
Article updated on 25 October 2021
The Pension Schemes Act 2021 received Royal Assent on 11 February 2021. Most notable among its provisions is the introduction of two key new criminal offences into the Pensions Act 2004 (PA 2004). These new offences became effective on 1 October 2021.
The new offences have been introduced with the stated aim of strengthening the enforcement powers of the Pensions Regulator (TPR) in order to "tackle the more serious examples of intention or reckless conduct that puts members' savings at risk; and strengthen the deterrent and punishment for that behaviour".1
The Act has been subject to severe scrutiny (most of it negative) for the wide scope of these offences and the potentially severe consequences for anyone who is found to have committed either of them. Chief amongst these criticisms is a concern that the offences may have unintended consequences for the conduct of financial restructurings, which may ultimately have a detrimental impact on all creditors and stakeholders (including DB scheme members).
In this article we take a look at the two new offences and consider their potential implications for the restructuring market and its various participants, as well as noting the changes that the Pension Schemes Act 2021 makes to the contribution notice (CN) regime.
New offences
The two new offences are as follows:-
Conduct risking accrued scheme benefits (section 58B, PA 2004)
A person does something that detrimentally affects in a material way the likelihood of accrued scheme benefits being received, and that person knew or ought to have known that the act would have such effect.
Avoidance of employer debt (section 58A, PA 2004)
A person does something that prevents recovery or the coming due of, compromises, settles or otherwise reduces all or part of a scheme's buy out debt, and that person intended the act to have such effect.
The following elements are common to both offences:-
- They are punishable by up to seven years' imprisonment and/or an unlimited fine (separately, there are also two new financial penalties whereby TPR may impose a fine of up to GBP1 million).
- They apply to conduct that comprises acts and/or failures to act.
- They apply to any person. The only exemption is for appointed insolvency practitioners acting in that capacity. As a result, in addition to companies and their directors, professional advisers (e.g. accountants, lawyers and insolvency practitioners acting pre-appointment) and other third parties (e.g. lenders, suppliers and other contractual counterparties) are potentially within scope.
- They will not apply where the person had a "reasonable excuse" for the act(s) in question.
Reasonable excuse
"Reasonable excuse" is not defined in the legislation. It has, however, been expanded upon in TPR’s criminal offences policy, published on 29 September 2021 (initially published as a draft in March 2021 and subsequently subject to a consultation process, following which it was updated).
As the policy acknowledges, it is ultimately for the courts to determine how the offences ought to be interpreted and applied. The policy is only an expression of TPR's own intended approach, and so is therefore not legally binding or definitive. However, given that most (if not all) prosecutions of these offences will be at the initiation of TPR, its views on the subject will carry significant weight for stakeholders and market participants.
The policy lists three factors which will be "significant" in TPR’s evaluation of what constitutes a reasonable excuse:-
- 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 which would have avoided or reduced the detrimental impact.
In relation to restructurings, the policy states that TPR will generally expect a person to have a reasonable excuse where they propose or act in accordance with:
- a restructuring plan pursuant to the Corporate Insolvency and Governance Act 2020, provided that the scheme is compliant with the legislative conditions; or
- a company voluntary arrangement (CVA), provided that the scheme’s creditor interest has been fairly valued and the scheme (via the PPF) had the opportunity to vote in the CVA,
in each case, provided relevant information has been shared with the trustees of the scheme and the PPF (and, in the case of a restructuring plan, TPR).
The policy also includes a case study, explaining how TPR expects its approach would apply in relation to various stakeholders in a set of particular circumstances. However, in reality this does not provide much additional insight beyond what might have already been expected, as the conduct in question represents a fairly extreme situation. This suggests that TPR is at this stage keen to avoid setting precedent for itself unnecessarily early, especially at the edges of its new powers.
The scope of the reasonable excuse defence, and the specifics of how it is defined, interpreted and applied by the courts (and TPR) will remain somewhat unclear until such precedents begin to be set, although certain specific scenarios are now covered (in TPR’s case at least) in the policy. This will of course be key to understanding the breadth of the application of the new offences.
Risks to market participants
Whilst it seems likely that the primary target of these new offences will be company directors, given the absence of carve-outs in the offences themselves, in theory almost anyone interacting with a company with a DB scheme in a restructuring scenario (other than an appointed insolvency practitioner acting in that capacity) could be within scope.
Lenders
Lenders will be reassured by the fact that, in relation to the third "reasonable excuse" factor above, TPR's policy specifically references, as an example of a situation where there would be a reasonable excuse (on the basis that there was no viable alternative), a scenario where an employer faces a liquidity crisis and its bank declines to lend further sums, triggering an insolvency process.
The policy further confirms that TPR would not seek to argue that a viable alternative would involve a lender ‘taking an uncommercial decision’ (e.g. to expect a lender to advance additional monies in a situation where they are not contractually obliged to and where doing so would be against the best interests of its shareholders).
The policy expressly acknowledges that restructurings typically move at pace, with decisions needing to be made quickly, and that this will be taken into account when TPR considers whether there was a viable alternative course of action which would have avoided or reduced the detrimental impact in question.
Unconnected lenders conducting ordinary business activity on arms-length terms are also referred to in relation to the first “reasonable excuse” factor above, where it is indicated that their refusal, revision or termination of a lending agreement would be incidental to any detrimental impact, so long as the purpose of the act was unrelated to the scheme.
Professional advisers
Likewise, professional advisers will take some comfort from the fact that TPR's policy confirms that a professional adviser is likely to have a reasonable excuse where they are acting in accordance with their applicable professional duties, conduct obligations and ethical standards.
The policy also contains examples of advisers whose conduct, in TPR's view, would preclude them from relying on the reasonable excuse defence. These include a legal adviser who assists with laying a trail of false evidence, and an accountant who knowingly assists in a material misstatement of an employer's accounts.
The policy has further confirmed that where dealing with “secondary liability” (i.e. in relation to a party who helped or encouraged the conduct of a principal offender), the test will be whether that party had a reasonable excuse for advising in the way that they did. An adviser may therefore have a reasonable excuse defence, even where the principal offender does not.
TPR has been clear from the initial consultation in respect of the draft policy that "the intent of the new criminal offences is not to change commercial norms or accepted standards of corporate behaviour". It is therefore to be hoped that third parties and professional advisers acting in accordance with their own (or their client's) best interests in relation to a proposed restructuring should not find themselves on the wrong side of these new offences. The contents of the policy does provide some comfort in this regard.
That being said, the new offences represent a substantial expansion of TPR's powers. For many participants in the restructuring market, they will be stepping into a world which, in terms of liability and consequences, resembles that of directorship far more than they will otherwise be accustomed to.
Consequences
Notwithstanding the comfort provided by the policy, it seems likely that the threat of criminal liability could act as a significant deterrent, not only to the sort of conduct which the new offences have been introduced to prevent, but also to legitimate restructuring activities in relation to companies and groups with DB pension schemes. Given the scope of the offences, all stakeholders involved in a restructuring will likely proceed with extreme caution, at least for an initial period.
This is compounded by the fact that the offences have become law at a time when many market observers are predicting an imminent increase in restructuring activity as various temporary Covid-19 support measures fall away and companies attempt to deal with significant amounts of debt accumulated during the pandemic.
TPR already operates a clearance process pursuant to which it can (broadly) confirm that it will not exercise its anti-avoidance powers (i.e. it will not issue a contribution notice or financial support direction) in relation to a proposed transaction.
TPR's policy confirms that this clearance process will not be available for the new offences. Directors (or other stakeholders) may, however, wish to make an application (in circumstances where one can be validly made) with the intention such clearance providing a clear indication of a reasonable excuse for the purposes of the new offences.
Contribution Notices
The Pension Schemes Act 2021 also expands upon the current CN regime. These changes, like the new criminal offences, came into force on 1 October 2021.
Two new bases on which TPR may issue CNs to employers have been introduced, and these take the form of tests, against which an action or inaction must be assessed. The first is called the Employer Insolvency Test, and the other is the Employer Resources Test. These are in addition to the two CN tests which are already in place, and therefore support rather than supersede them.
Employer Insolvency Test
At the time of the act or failure to act, the scheme was in deficit (as estimated by TPR) and, had a buy-out debt fallen due, this act or failure to act would have materially reduced the amount of debt likely to be recovered by the scheme.
Employer Resources Test
The act or failure to act reduced the value of the resources of the employer and that reduction was material relative to the estimated buy-out debt in relation to the scheme. It is important to note that the reduction’s materiality when compared to the resources of the employer is not relevant to this assessment.
For both of these tests, a statutory defence will be available where the person in question gave due consideration to the extent to which the act or failure to act may have the effect set out for the relevant test above, and if so, they took all reasonable steps to eliminate or minimise the potential for it to have such effect. It must also be reasonable for the person to have concluded that the act or failure to act would not have the effect in question.
Alongside the addition of these two tests, another new criminal offence has also been introduced for failing to comply with a CN. This does not carry a potential penalty of imprisonment, but is still subject to an unlimited fine. Like with the other criminal offences, there is also a separate financial penalty whereby TPR may impose a fine of up to GBP1 million. Both only applies to persons who have been issued with a CN, and again there is a defence if the person has a “reasonable excuse”.
The potential retrospectivity of these two tests and the criminal offence is unclear currently. Though the Pensions Minister had previously stated that they would not be retrospective in effect, it has since been indicated in the policy that evidence from prior to their commencement date might be taken into account when assessing acts or failures to act which take place after that date.
In general, this expansion of the CN regime is intended to catch more “day-to-day” activities undertaken by employers, and should be kept in mind when carrying out restructuring transactions, alongside the two key new criminal offences.
Conclusion
The introduction of contribution notices and financial support directions resulted in a surge in clearance applications from concerned employers. That initial surge, partly because of the practical difficulties identified above, soon slowed dramatically, from a peak of 230 cases in 2006 to just three in 2019. This also reflects the process by which the application of TPR's new powers became established, and market participants became more comfortable with the parameters of acceptable conduct and likely risks associated with restructuring activities.
Over time a similar change can be expected in relation to the new offences. The risk, however, is that this learning curve will not play out quickly enough for those companies with an acute need for some form of financial restructuring, of which, in light of present circumstances, there are likely to be many. In the interim, cautious behaviour by directors and other stakeholders may result in otherwise viable businesses being unable to undertake a necessary restructuring. In such a scenario all stakeholders, not just DB scheme members, will lose out.
1David Fairs, TPR Executive Director of Regulatory Policy, as quoted in TPR's consultation announcement, 11 March 2021.
