The Pension Schemes Act 2021 (the 'Act') amends the Pensions Act 2004 (the '2004 Act') in order to provide the Pensions Regulator ('TPR') with a wealth of new powers. Now that the day we have all been waiting for, 1 October 2021 (when the majority of the Act’s provisions were due to come into force) has come and gone, we’re taking a look the material provisions which came into force on that date - and what those changes mean.
New financial penalties (section 115 of the Act)
TPR now has the power under section 88A of the 2004 Act to impose a fine of up to one million pounds to anyone who fails to comply with its powers and functions. In some cases, the Act introduces this ability for the first time, and in others, it replaces the civil penalties TPR could previously utilise under section 10 of the Pensions Act 1995 (the '1995 Act') with the new, higher fine.
Contribution notice tests (section 103 to 106 of the Act)
Two new contribution notice tests – the employer insolvency test and the employer resources test – are now in force under section 38 of the 2004 Act.
The tests which existed before the Act (the main purpose and material detriment tests) require an assessment of the impact of an act or failure on a pension scheme. However, the practical reality is that the impact is most often on a scheme’s employer, and proving the indirect consequences for the scheme is evidentially challenging for TPR. The new tests are designed to look at the impact of an act or failure on the sponsoring employer on a ‘snapshot’ basis in order to make the whole process more efficient.
The employer insolvency test is set out in section 38C of the 2004 Act and enables TPR to issue a contribution notice where there has been an act or failure to act and TPR is of the view that:
- immediately before that act or failure the scheme was in deficit; and
- if a debt under section 75 of the 1995 Act (a 's.75 debt') had fallen due, the act or failure would have materially reduced the amount that could have been recovered from the employer had the employer become insolvent.
TPR’s assessment can be based on a hypothetical scenario, there is no requirement for an actual insolvency event. However, the usual test for reasonableness (which prevents TPR from issuing a contribution notice unless it is reasonable to do so in the circumstances) continues to apply. There is also a statutory defence introduced under section 38D of the 2004 Act, which will prevent TPR issuing a contribution notice if:
immediately after the act or failure the scheme is not in deficit; or
before becoming a party to the act or failure, the person gave due consideration to the impact of the act or failure on the recoverability of a s.75 debt and where they thought it might be detrimental, they took reasonable steps to eliminate the detriment; and
in the circumstances, it was reasonable to conclude that the act or failure would not materially reduce the recoverable debt
The employer resources test is set out in section 38E of the 2004 Act and enables TPR to issue a contribution notice where there has been an act or failure to act and TPR is of the view that:
- the act or failure to act would have reduced the value of the employer’s resources; and
- the reduction was material relative to the amount of the scheme’s estimated s.75 debt.
Employer resources are based on profits before tax and valued in accordance with the Pensions Regulator (Employer Resources Test) Regulations 2021 (which also came into force on 1 October). As with all other contribution notice tests, the requirement for reasonableness again applies here and there is a new statutory defence under section 38F of the 2004 Act which will prevent TPR issuing a contribution notice if:
before becoming a party to the act or failure, the person gave due consideration to the extent to which the act or failure might reduce employer resources relative to the estimated s.75 debt; and
in the circumstances it was reasonable to conclude that the act or failure would not bring about a reduction to the value of employer resources relative to the estimated s.75 debt; or
if the person thought the act or failure might have such an effect, they took all reasonable steps to eliminate or minimise that effect.
Anyone who fails to comply with a contribution notice without reasonable excuse could be guilty of a criminal offence under section 42A of the 2004 Act. That offence carries a potentially unlimited fine. Alternatively, TPR impose the up to £1m fine under section 88A of the 2204 Act.
Criminal offences (section 107 of the Act)
In addition to the new offence associated with contribution notices, TPR now has the power to prosecute any person who without reasonable excuse:
- Avoids employer debt (new s.58A of the 2004 Act).
- Does (or doesn’t do) something which risks the security of member benefits (new s.58B of the 2004 Act)
The offences are punishable by up to seven years in prison and a potentially unlimited fine. It is the latter offence, conduct risking accrued benefits under new section 58B, which has attracted much attention - and that is because it is very widely drafted:
- Person: essentially includes anyone except for someone appointed as and working in their role as an insolvency practitioner. That means trustees, employers, lawyers, banks, insurers, actuaries, lenders, and other parties not directly connected with a pension scheme could theoretically be caught. That is not the case for TPR’s other anti-avoidance powers, for instance contribution notices, which can only be issued against scheme employers or parties connected to them.
- Intent: there is no requirement for intent. The offence only requires that the person knew or ought to have known the effect their conduct would have. In theory that means accidental errors or seemingly ‘good’ decisions which turn out to be ‘bad’ could be caught.
- Limitation: there is no limitation period in relation to either of the offences, though TPR cannot prosecute acts (or failures to act) which occurred before 1 October 2021.
On 29 September 2021 TPR published a new criminal offences policy having consulted on a draft version earlier in the year. The policy makes it clear that the vast majority of people involved directly or indirectly with the running of a pension scheme should not be concerned. TPR states in the policy that it does not intend to prosecute behaviour which it considers to be ordinary commercial activity. Rather, TPR will investigate and prosecute only the most serious examples of intentional or reckless conduct that were already within the scope of its contribution notice powers or would have been if the person was connected with the scheme employer.
At the same time, TPR published three further draft policies for consultation dealing with how it intends to approach overlapping powers, the imposition of fines and its information gathering powers. In relation to overlapping powers, the draft policy confirms that TPR could choose to pursue an investigation through either its regulatory or criminal powers or both. However, TPR’s primary objective is to protect savers and obtain the funds necessary to do that. The draft policy states therefore that it is likely that TPR will prioritise regulatory proceedings, for instance by seeking a contribution notice. If TPR does pursue regulatory and criminal proceedings in tandem, it says it will usually seek to exhaust criminal proceedings before imposing any regulatory penalty.
The latest consultation closes on 21 December 2021, so it will be a while yet before TPR’s final position is known. However, trustees, advisers and other parties working in the pensions industry are likely to breathe an anticipatory sigh of relief at the proposals so far and in light of the clear guidance from TPR on its objectives in the final criminal offence policy.
Information gathering powers (sections 110 - 114 of the Act)
TPR’s information gathering powers have been extended by the Act in order to create consistency in approach across all its functions. The powers in place before 1 October had been introduced in a piecemeal fashion over a number of years and were in need of a tidy-up.
The new powers permit TPR to require a broad range of people - trustees, employers, advisers and any one TPR thinks is likely to hold information relevant to its functions – to attend an interview. The interview must be preceded by a notice setting out the matters TPR wishes to address and during the interview the person will be required to answer questions and provide explanations in relation to those matters. Refusal to do so without a reasonable excuse is an offence under new section 77(1A) of the 2004 Act
The Act also extends the grounds on which TPR can inspect premises and which premises it is able to inspect.
The Act removes those restrictions by:
- Explicitly permitting inspections (under new section 72(2A) of the 2004 Act), where TPR is investigating whether a contribution notice, financial support direction or restoration order ought to be issued.
- Extending the range of premises TPR can inspect to include those where it thinks documents relevant to the administration of the sponsor employer’s business in relation to scheme are held, where that administration or connected work is being carried out or where documents relevant to the change of ownership of the employer or a significant asset are stored.
As well as the new offence for failing to attend or provide information at an interview (which sits alongside existing offences in the 2004 Act), the Act gives TPR power to impose fixed and escalating penalties for failing to comply with its information gathering powers or who for hindering or preventing an inspection. Under the Pensions Regulator (Information Gathering Powers and Modification) Regulations 2021, those fines are:
- Fixed penalty: £400
- Escalating penalty (individuals): £200 per day
- Escalating penalty (non-individuals): cumulative daily rate starting at £500 on day one and up to £10,000 from day 20 onwards
The new financial penalty under section 88A of the 2004 Act is also available to TPR in the event that someone knowingly or recklessly provides it or the trustees or managers of relevant schemes with false or misleading information.
Changes to the notifiable events regime
TPR is able to use its new powers under section 88A of the 2004 Act to impose a fine of up to £1m in respect of failures to comply with the notifiable events requirements after 1 October 2021. The civil penalties under the 1995 Act (which are capped at a lower level) will continue to apply in cases where the requirement to notify TPR arose before that date (even though TPR might not become aware of any issue until after it).
There are more substantive changes to the notifiable events regime to come. Those changes, which will create a two-step notification process for certain events, have not yet been finalised. The government is currently consulting on draft regulations containing the details of the changes which closes on 27 October 2021, with the final regulations expected to come into force on 6 April 2022.
What does this mean?
The Act brings about a significant change in pensions legislation. Whilst most schemes will not be affected by the changes which came into force on 1 October on a day to day basis, trustees and sponsoring employers will need to understand the scope of the powers they afford TPR to ensure they don’t accidentally fall foul of them in the future.
Trustees and employers should take professional advice in relation to any projects they have planned which could impact their schemes to ensure they take the necessary steps to comply with the Act’s requirements. Care should also be taken in documenting considerations and decisions so that this paper tail can be provided to TPR at a later date should that become necessary.