Exactly a month after the Pension Schemes Act 2021 (the Act) received Royal Assent on 11 February 2021, the Pensions Regulator has published its much anticipated draft policy and consultation on how it will investigate and prosecute the new criminal offences (the Offences). The consultation closes on 22 April 2021.
The draft policy outlines the Regulator’s proposed approach with helpful examples of what kind of behaviour and actions might come within the remit of the Offences. It provides useful guidance confirming that the Offences were not intended to change ‘commercial norms or accepted standards of corporate behaviour’; it is the Regulator’s policy to prosecute ‘serious intentional or reckless conduct’.
However, there is still uncertainty for the pensions industry regarding how the new criminal powers will be interpreted in practice and perhaps also for the prosecuting authorities – as the draft policy notes, it will be the courts which “ultimately decide the correct interpretation of the law”.
Recap of the Offences
|Who it applies to
|Avoidance of an employer debt without reasonable excuse
|Up to 7 years in prison and/or unlimited fine
|Conduct which detrimentally affects in a material way the likelihood of accrued scheme benefits being received without reasonable excuse (the Conduct Offence)
|Up to 7 years in prison and/or unlimited fine
|The Offences are expected to come into force this Autumn.
Addressing the concerns
Serious concerns have been raised about the scope of the new offences, particularly the Conduct Offence, the wording of which is much wider in terms of both the types of behaviour it could apply to and who could be caught by it, than had been proposed in the Government’s 2018 consultation.
The Pensions Minister has noted that it is “certainly not the intention to frustrate legitimate business activities where they are conducted in good faith” and the Regulator reiterates this, noting that the intent of the new offences is not to “achieve a fundamental change in commercial norms or accepted standards of corporate behaviour” but to catch the “more serious examples of intentional or reckless conduct that puts members’ savings at risk; and strengthen the deterrent and punishment for that behaviour.”
Proposed approach – close link to existing CN powers
The Regulator’s CN powers feature heavily in the draft policy; its approach to the Offences will be ‘closely linked’ to its CN power with the expectation being that it expects to consider prosecuting in “broadly the same circumstances where we would consider seeking a CN”. Having said that, the draft policy does refer to the possibility of pursuing an Offences prosecution where recovery might be low (and a CN would not be sought) if the deterrent influence of prosecution would be in the public interest.
The draft policy examines the similarities and differences between the Offences and CNs. For example, the Offences echo two of the CN grounds whilst the scope and burden of proof position differ. For certain aspects, the Regulator will adopt the same interpretation because, although there are differences, the Regulator believes that the same effect was intended, for example, when identifying secondary liability.
The Conduct Offence and material detriment
The similarities of the material detriment wording used in both the Conduct Offence and a CN issued on material detriment grounds mean that the Regulator intends to adopt the same approach to both. In particular, it will take account of its existing material detriment code of practice, guidance and past determinations.
This means that a prosecution under the Conduct Offence would not be expected where a statutory defence to a Material Detriment CN could be established. This involves demonstrating that ‘due consideration’ was given to the extent of any material detriment, where a potentially materially detrimental impact was identified all reasonable steps were taken as regards mitigation and where it was concluded that there would be no material impact this was a reasonable conclusion to reach.
When considering whether a person ought to have known that their actions would cause material detriment under the Conduct Offence, the Regulator will look at the circumstances at the time of the act and “not with the benefit of hindsight based on knowledge of what has happened since”.
One of the principal concerns around the Offences is their potential ability to catch anybody dealing with a scheme or its employers, including advisers and third parties such as banks. The draft policy notes that someone who ‘helps or encourages’ another to commit an Offence could be held accountable in the same way as the principal offender. However, this would not be the case where an adviser has a ‘reasonable excuse’ even where the client is found liable.
Some comfort for advisers may be found in the Regulator’s statement that “in most instances, a professional person, acting in accordance with their professional duties, conduct, obligations and ethical standards applicable to the type of the advice being given, is likely to have a reasonable excuse.” Examples given of potentially prosecutable circumstances for the Conduct Offence include where an adviser has helped ‘lay a trail of false evidence’ or an actuary engaged by the employer gives accountancy advice knowing full well that they do not have the necessary expertise.
The onus will be on the prosecution to prove that the person did not have a reasonable excuse. However, the Regulator makes clear that it expects an explanation of actions with suitable contemporaneous evidence of ‘reasonable excuse’ to be provided. Therefore, it is important that trustees and employers keep an audit trail of relevant matters and decisions and that they take suitable advice – records should be kept for a suitable period after an event given the limitation period aspects discussed below.
Although each case will be fact-specific three factors will be particularly instrumental in determining whether there is a reasonable excuse:
|Incidental or central consequence?
|Was the detrimental impact an incidental consequence rather than a fundamentally necessary step to realise the purpose? (The more incidental the more that purpose would tend towards demonstrating a reasonable excuse.)
|Adequacy of mitigation
|Similar to the way in which mitigation is assessed in clearance cases for the purposes of Contribution Notices, the Regulator expects fair treatment of the scheme in relation to other parties.
|Was there a viable alternative which could have avoided or reduced the detrimental impact? If so, that would suggest there was no reasonable excuse.
Limitation and retrospectivity
The draft policy notes that whilst there is a 6-year limitation period for CNs there is no limitation period for the new criminal powers which leaves the possibility of prosecution open-ended. The Pensions Minister has confirmed that the Offences and extended information gathering powers will not be retrospective. However, the draft policy notes that evidence pre-dating the commencement of the Offences could be relevant to a Regulator investigation afterwards, e.g. if it indicates intention.
No clearance available
The Regulator cannot grant clearance for the Offences (although we expect the introduction of the Offences will lead to an increase in clearance applications under the Contribution Notice regime on the basis that it is likely to be difficult to show that a party had no reasonable excuse where it sought and obtained clearance from the Regulator in respect of its Contribution Notice powers).
Selecting cases for investigation and prosecution
Cases will be chosen for prosecution with the policy intent of the Offences in mind, for example, where there has been unfair treatment of the scheme or significant financial gains to the scheme’s detriment. The kinds of act which could be within scope for prosecution include:
- Sale of an employer without replacement of a parental guarantee to the scheme which leads to loss of the guarantee (and where the trustees were not given advance notice of the sale);
- A purchase of an employer with no further investment, subsequent mismanagement and extraction of value preceding the company entering into administration;
- Asset stripping with leads to significant weakening of scheme support; and
- Taking steps to cause the unnecessary insolvency of a scheme’s sponsoring employer with the intention of purchasing the employer’s business absent the scheme.
The Regulator will consider people’s relationship and closeness to the employer, scheme and act, their involvement and influence and consequential benefits.
Prosecution of the Offences could be brought not just by the Regulator but in England also by the Secretary of State or the Director of Public Prosecutions (with Scotland and Northern Ireland having a similar set up reflective of differences in the prosecution system). The Regulator’s approach only applies to the Regulator and the draft policy notes that other prosecuting authorities could choose a different approach or interpretation.
Ultimately, even when the provisions are brought into force there will still be unknowns and, to an extent, this is inevitable until we see how the Regulator approaches the prosecution of the Offences in practice. There will almost certainly be a period of uncertainty and more cautious corporate behaviour at least whilst the Offences and other extended Regulator powers ‘bed in’.
It is essential that trustees and employers have procedures in place to identify when corporate activity may come within the remit of the extended Regulator powers, that they take advice as necessary and that an appropriate audit trail is kept by all parties including advisers of relevant matters and decisions.