In its response to its June 2018 consultation on plans to improve the powers of the Pensions Regulator, the Government’s stated aim was to better protect members’ benefits in corporate deals. This was to be achieved by improving the ability of both the Regulator and scheme trustees to monitor relevant corporate transactions and other events which may have impacted adversely on the funding of a final salary (defined benefits) pension scheme.
In February 2019, the Government published its response to the June 2018 consultation and outlined its plans to go ahead with proposals for criminal sanctions to prevent and penalise the mismanagement of pension schemes. It first proposed a new custodial sentence of up to seven years’ imprisonment, or an unlimited fine. This was to target individuals who “wilfully or recklessly” endangered members’ pensions by such actions as:
- chronic mismanagement of a business;
- allowing unsustainable deficits to build up; or
- taking unjustifiable investment risks
or a combination of any of these. The Government’s second proposal was for an unlimited fine for a failure to comply with a contribution notice – a mechanism under which the Regulator can make a demand for a payment into an underfunded scheme. A civil sanction of up to £1 million was also to be introduced for this offence.
Under the new Pensions Schemes Bill 2019, which was published on 16 October this year, two new criminal offences are introduced:
- failure to comply with a contribution notice from the Regulator; and
- avoidance of the sponsoring employer’s debt in a pension scheme.
Under the Bill, the Regulator is given powers to examine when a person took steps to deliberately avoid an employer debt. The Bill provides that a person will be liable on conviction to a fine and/or a prison term of up to seven years where they act or deliberately fail to act in a way that:
- prevents the recovery of an employer debt in whole or part, or prevents such a debt becoming due. Compromising or otherwise settling or reducing the debt is also caught; and
- detrimentally affects in a material way the likelihood of accrued scheme benefits being received, provided they knew or ought to have known that the act or course of conduct would have that effect, and have no reasonable excuse for engaging in such conduct.
Concerns have been raised about these new criminal offences. Their scope is not limited to “wilful or reckless” behaviour, as outlined in the consultation response. Nor is it limited to employers/associates of employers. Could “persons” under the Bill include trustees, advisers and those involved in putting in place investment arrangements?
There may be many circumstances in which the “likelihood” of scheme benefits being received is detrimentally affected. Could poor investment decisions fall foul of this provision? And what about the sponsor taking on additional company debt? Is detriment limited to financial detriment or could it be a wider concept and include poor administration and data protection lapses?
As so frequently in pensions law, the detail is awaited in yet to be published regulations. Under the proposed legal framework, it will eventually be for the courts to determine whether the person or persons prosecuted have a “reasonable excuse” for their actions.
Questions remain in relation to how many of the terms used in the statute are to be defined and how the sanctions are to be enforced. Collecting evidence that passes the criminal burden of proof of “beyond reasonable doubt” is unfamiliar territory for the Regulator and will be fundamental to the effectiveness of the deterrent.