In depth

Pension Schemes Act 2021: new Powers for the Pensions Regulator

Gateley Legal

Article by

The Pension Schemes Act 2021 received Royal Assent on 11 February and is arguably the most important piece of pensions legislation since 2004.

The Act covers a range of issues, most notably significant enhancements to the Pensions Regulator’s “moral hazard” or “anti-avoidance” powers. Concerns have been raised by the pensions industry – and the wider business community – as to the scope of these new powers, in particular the new criminal offences which could apply to anyone involved in making decisions which affect a defined benefit scheme or its employer, including third parties such as advisers and banks.

This insight summarises the provisions of the Act relating to the Regulator’s new powers. See our separate insight for a summary of the other provisions introduced by the Act

Background

Following a number of high profile insolvencies of employers with large pension scheme deficits, questions were raised as to whether actions taken by the employers and their owners prior to the insolvency had had a detrimental impact on the scheme and whether the Regulator had sufficient powers to protect schemes from such actions. A review of the Regulator’s moral hazard powers was undertaken, culminating in a DWP consultation which proposed extending the scope of the Regulator’s existing powers and introducing new criminal offences targeting:

“individuals who wilfully or recklessly mishandle pension schemes, endangering workers’ pensions, by such things as chronic mismanagement of a business; or allowing huge unsustainable deficits to build up; or taking huge investment risks; or a combination thereof.” 

New grounds for contribution notices

The Act introduces two new grounds upon which the Regulator can issue a contribution notice to scheme employers and connected or associated parties. These are the employer insolvency test and the employer resources test:

Employer Insolvency Test Employer Resources Test
An act (or failure to act) that would have resulted in a scheme recovering a lower amount from the employer, had the employer suffered an insolvency immediately after that act (or failure to act). An act (or failure to act) that reduces the resources of an employer to an extent that is material in the context of the estimated section 75 debt due to the scheme (ie the shortfall in the scheme’s funding on a buyout basis).

These tests could apply to a wide range of situations including:

  • restructuring or group reorganisations;
  • refinancing or granting security;
  • business sales; and
  • payment of dividends. 

It should also be noted that the employer insolvency test could potentially be met even where the act or failure to act does not impact on the employer itself. For example, if the scheme benefits from a guarantee from another group company, actions which affect the amount that the scheme would recover under the guarantee would be caught.

There will be a statutory defence to the imposition of a contribution notice on the new grounds. This is similar to the statutory defence for the existing “material detriment” ground for contribution notice. The defence is available if the party concerned can show that:

  • it gave due consideration to the extent to which the relevant test(s) applied;
  • where it considers that the relevant test(s) might apply, it took all reasonable steps to eliminate or minimise the potential for the act or failure to have such an effect; and
  • having regard to all of the relevant circumstances at the time it was reasonable to conclude that impact would not be material.

Because the tests for both of these new grounds focus on the immediate impact of the act or failure in question, there is a risk that they could lead to some short term decision-making, whereas in most cases the best outcome for the pension scheme is the long term viability and support of the employer. But, on the other hand, an immediate reduction in solvency coverage or employer resources can have a significant detrimental impact on a scheme if the viability or support is subsequently lost so it is important to consider the immediate impact too. 

The key to managing this risk will be giving consideration of the effect on the pension scheme as early as possible in any discussions, including discussing the matter with the trustees (and, if appropriate, the Regulator). Pension scheme trustees regularly need to balance a range of risks and a collaborative approach to identifying and mitigating both the short- and long-term risks is often in all parties’ interests. Ultimately if agreement has been reached with the trustees then, provided the trustees themselves have acted reasonably (in particular that any conflicts of interest have been appropriately managed), then it is likely to be difficult for the Regulator to demonstrate that it would be reasonable to impose a contribution notice.

If a party is seeking to rely upon the statutory defence it will be important to be able to demonstrate that the above conditions were met at the time of the act or failure to act. An audit trail should be kept of issues considered, advice taken and discussions with the trustees. 

Although the Pensions Minister has confirmed that the Regulator’s new powers will not come into force until the Regulator has issued updated guidance  – and that they will not apply to any acts or failures to act before this - that is not clear from the legislation itself and arguably the new powers would apply to any acts or failures meeting the new tests that occurred in the last 6 years. Hopefully this will be clarified by the Orders bringing the provisions into force. 

New Criminal Offences

The Act introduces three new criminal offences, as well as extending the scope of the existing offence of knowingly providing false or misleading information to the Regulator.

It was originally proposed that there would be two new offences, failing to comply with a contribution notice and wilful or reckless behaviour in relation to a defined benefit pension scheme . However, the latter has been split into two: avoidance of an employer debt without reasonable excuse and conduct risking accrued scheme benefits without reasonable excuse. The new offences and the extension of the existing offences are summarised in the table below.

Offence Penalty Who it applies to
Failure to comply with a contribution notice
 
Unlimited fine Employers and connected or associated parties
Avoidance of an employer debt without reasonable excuse
 
Up to 7 years in prison and/or unlimited fine Anyone
Conduct risking accrued scheme benefits without reasonable excuse Up to 7 years in prison and/or unlimited fine Anyone
Providing false or misleading information in relation to a notifiable event or a funding strategy statement Up to 2 years in prison and/or fine of up to £1m The person required to provide the information

Serious concerns have been raised about the scope of the new offences, particularly the conduct risking accrued scheme benefits 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. It is not limited to parties connected to the scheme employer and so could potentially attach to anybody dealing with a scheme or its employers including trustees, advisers and third parties such as banks. 

The offences could potentially catch a range of routine activities by trustees and employers and other legitimate corporate activity. In addition to the examples given above in relation to the new contribution notices, the new offences could apply in relation to apportionment arrangements (whereby the trustees agree to apportion some or all of an employer’s liability to another entity) or even the exercise of discretionary powers under a scheme’s rules.

Whilst one would expect that all legitimate activity would be excluded on the basis that the parties had a “reasonable excuse”, there are significant concerns that uncertainty as to whether an act could lead to criminal sanctions might deter many from getting involved with any businesses with a defined benefit scheme or from taking decisions affecting the scheme and so the new powers could be counter-productive, potentially reducing the security for members rather than enhancing it. 

The Government and the Regulator have sought to play down these concerns, making it clear that the Regulator will issue guidance setting out its expectations and enforcement policy and that a proportionate approach will be applied. The new offences will not come into force until the guidance has been published.

Whilst we would echo the concerns that have been raised about the scope of the new offences, it is important to consider these new powers in the context of the Regulator’s approach to the use of its existing powers. Whilst we think the Regulator will feel under some pressure to use its new powers to demonstrate its ability and willingness to do so, in the vast majority of cases it is hoped that the existence of the new powers will help to drive better behaviour towards pension schemes so that they are rarely used in practice. That certainly seems to be how the Regulator views them, describing the new powers as a deterrent to those who would act inappropriately towards a pension scheme.

Hopefully the forthcoming guidance from the Regulator will give the industry the certainty it needs including some guidance upon what might constitute a “reasonable excuse”. Over time we would also expect the pensions industry to develop an in depth understanding of the scope of the powers and how they are applied in practice, as happened when the moral hazard powers were first introduced in 2004. Pension scheme employers and trustees already have a range of expert advisers who will be able to assist in understanding and managing this risk.

As with the new contribution notice powers, the key to managing this risk and avoiding tripping up into a potential criminal investigation will be giving early consideration to the potential effect of any proposals on the pension scheme and how this can be mitigated, early engagement with the trustees and keeping an audit trail of matters considered and advice taken etc.

New notifiable events and Declarations of Intent   

Two additions will be made to the list of events that scheme employers must notify to the Pensions Regulator.  The new events are:

  • a decision to sell a material proportion of the business or the assets of the employer; and
  • a decision to grant security that ranks ahead of the pension scheme.

Details of any notifiable event must be provided to the Regulator as soon as reasonably practicable, with the Regulator’s Code of Practice suggesting that in most cases this would be by the business day following the event in question.

There will also be a new requirement to provide advanced notification or a “declaration of intent” to the Regulator prior to certain events. The events to be covered by this requirement will be confirmed in Regulations, but they are expected to include both of the new notifiable events mentioned above as well as a change in control of the scheme employer.

The notification must include details of: the event; any adverse effect on the scheme; any mitigation to be provided; and any communications with the trustees. The notification must be copied to the trustees. It should also be noted that the obligation to submit a declaration of intent will apply to both the employer and connected or associated parties. This is particularly important for large organisations such as multinational companies, where decisions could be made at group level which affect the entity that is the scheme employer. 

It is hoped that this new requirement will encourage early consideration of the potential effect on the pension scheme and engagement with the trustees which, as noted above, will also help prevent exposure to the Regulator’s new moral hazard powers. 

The penalty for non-compliance with the new notification requirements will be a fine of up to £1m (and, as noted above, potential criminal liability if misleading or false information is knowingly provided).

New information gathering and investigatory powers

The Act also strengthens the Regulator’s investigatory powers by:

  • removing the restriction on the Regulator’s powers to ask a person to provide information that is incriminating to him/her or his/her spouse (subject to some restrictions on what the Regulator can use that information for);
  • extending the Regulator’s power to compel a person to attend an interview (which currently only applies in relation to auto-enrolment and defined contribution master trusts) to all of its regulatory functions; and
  • extending the Regulator’s powers to inspect a premises without warrant – and inspect documents held there – to cover more of its regulatory functions including investigations into the potential use of its moral hazard powers (again the power is currently limited to a much narrower range of functions). 

Gateley Plc is authorised and regulated by the SRA (Solicitors' Regulation Authority). Please visit the SRA website for details of the professional conduct rules which Gateley Legal must comply with.

SubscribeHide

Forward thinking insight

Direct to your email inbox

Subscribe now