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Lock ‘em up? The Pensions Regulator’s new criminal powers

From 1 October 2021, The Pensions Regulator (TPR) will have new criminal powers to bolster its anti-avoidance arsenal, but what does it really mean for those involved with the running of pension schemes?

The new powers allow TPR to investigate and prosecute any person who avoids an employer debt, anyone who does (or doesn’t do) something which would prevent pension scheme members from receiving their benefits in full, and anyone who does not comply with a contribution notice issued under Section 38 of the Pensions Act 2004.

Anyone prosecuted by TPR for these offences faces up to seven years in prison and a potentially unlimited fine. Either consequence is likely to be a worrying one for those potentially within scope of the new powers, and many are speculating that we might see an exodus of non-professional trustees who do not want to open themselves up to the risk of imprisonment for a task they often volunteer to do without any specialist knowledge or reward.

The new measures beg the question: how concerned should those involved with the management of pension schemes really be about punishment, at a criminal level, for the consequences of their decisions?

In short, it is not entirely clear at this stage. However, comments from TPR to date suggest that the powers are designed to address only the most serious of cases and that trustees, advisers and others acting in good faith are not intended to be the main target.

The offences

The new offences, introduced by the Pension Schemes Act 2021, are:

  1. Avoidance of employer debt (new section 58A of the Pensions Act 2004).
  2. Conduct risking accrued scheme benefits (new section 58B of the Pensions Act 2004).
  3. Failing to comply with a contribution notice (new section 42A of the Pensions Act 2004).

It is the first two of these offences which are causing the most controversy, though this is not the first time TPR has sought to regulate the conduct they address. TPR already has the power to impose a contribution notice under Section 38 of the Pensions Act 2004 act where such conduct has occurred, however the new offences both strengthen and broaden TPR’s powers: firstly by allowing it to impose more severe penalties on those already caught by Section 38, and secondly by enabling it to impose those penalties on people who are not caught by Section 38.

Section 38 only permits TPR to issue a contribution notice to a ‘person’ that was, or was connected with, a scheme’s sponsoring employer. The new offences do not contain a similar restriction, and so ‘person’ for these purposes could include the sponsor, a person connected with the sponsor, the trustees and their respective advisers (but not insolvency practitioners for whom there is an exemption). Understandably, the pensions industry is keen to understand how TPR will use these powers.

TPR has issued a draft policy on how it intends to use its powers for consultation, however it does not currently contain sufficient detail to allay industry concerns on the matter.

How will the powers be used?

In its draft policy on the new offences, TPR acknowledges that the new powers are “not intended to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour in the UK” but are designed to address serious incidences of conduct caught by Section 38, or that would be caught by it if the person was connected with the sponsoring employer.

At a policy level, it appears that for now at least that TPR will not be targeting trustee boards or scheme advisers acting in good faith. Rather, it will be focussing its efforts on tackling the most serious cases, and in such cases it is probably reasonable for TPR to be able to take action against a wider pool of people who, under Section 38 alone, might avoid any real consequences for their deliberate or reckless conduct.

Prosecution as a first resort?

TPR has not stated what it considers to be a serious case, nor has it said definitively whether prosecution will be used as a last resort, but it is clear that the new powers are intended to work with the Section 38 powers, not replace them. TPR has said that it may choose to use the powers alone or together, but the basis on which it might choose to adopt a particular approach remains unclear with the draft policy simply stating “Whether we decide to use the CN [contribution notice] or the criminal offence or both will be guided by the efficient use of our resources to deter reposition of similar bad behaviour and act as a warning to others.”

Does this mean that TPR will be free to decide which power to use depending on the political climate, or on how much of an example it wishes to make of the parties involved? Possibly, and it is easy to see why this might make a person nervous. Had TPR been given these powers in the immediate wake of the BHS controversy for example, finding yourself up next in TPR’s crosshairs would certainly have been an unenviable position.

However, whilst it is sensible for those involved in the management of pension schemes to be aware of these offences, the picture is perhaps not quite as bleak as recent industry commentary suggests. There are a number of steps along the path to prosecution, and a number of obstacles which might lead to an alternative outcome, for example:

  • TPR can only prosecute cases where the offence occurs on or after 1 October 2021 (though TPR may consider evidence where the evidence (but not the offence it relates to) predates that date).
  • An offence is only be committed if the person accused did not have a reasonable excuse for their conduct.
  • TPR’s stance is that it will usually engage with relevant parties early and before any decision to prosecute is made, and so this investigation process might rule out prosecution at an early stage.
  • It is not enough for TPR to have sufficient evidence to justify a prosecution. It must also establish that prosecution is in the public interest.

It seems reasonably safe to say then, that prosecution is unlikely to be TPR’s first course of action in most cases, and that where prosecution does happen it will not be a surprise to the parties involved.

What happens next?

The consultation on TPR’s draft policy closes on 22 April 2021. Given the controversy stirred up by the new powers, we expect TPR will have a significant number of responses to consider, so it may be some time until any further clarity is offered. We expect this to remain a hotly debated topic in the run up to 1 October 2021 when the offences are expected to come into law.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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