A lot has already been written about the new ‘moral hazard’ powers of The Pensions Regulator (TPR) under the Pension Schemes Act (PSA) 2021. In particular, for over a year, concerns have been widely raised (and largely dismissed by policy makers) about the prospective ambit of TPR’s powers in terms of both the people and activities in scope of them. TPR has subsequently consulted on how their new powers could be used in practice and provided practical examples to help contextualise their application.
Should this guidance provide sufficient assurance to employers, trustees and advisers?
By way of background, PSA 2021 introduces two new criminal offences:
- the offence of avoidance of employer debt; and
- the offence of conduct risking accrued scheme benefits.
The offences are not yet in force, but are expected to be by Autumn 2021 and, in the meantime, TPR has issued a consultation on how it plans to use these criminal powers, along with a draft TPR policy. These documents are relevant not just to trustees and employers, but also anyone else involved with defined benefit (DB) pension schemes.
Both offences mentioned above are punishable by up to seven years in prison and / or an unlimited fine. They apply to any person, including trustees, employers, professional advisers and others (e.g. lenders). Insolvency practitioners are, however, excluded.
That said, no offence is committed if there is a “reasonable excuse” and the burden of proof will be on the prosecution to prove the absence of a reasonable excuse; i.e. TPR has to prove that a person had intent or “knew or ought to have known” what they were doing. Unlike contribution notices and financial support directions, there is no TPR clearance process for the new offences.
As intimated at the start of this blog, the criminal offences are drafted widely and concerns about impact on legitimate corporate activity have been voiced – very publicly. One issue has been the lack of clarity as to what constitutes a “reasonable excuse”, but TPR’s draft policy goes some way towards addressing this. Key points to note are:
- TPR’s expectation is that the offences should not change commercial norms or accepted standards of corporate behaviour in the UK. (The process for prosecuting the offences should be comparable to that for contribution notices or where the deterrent effect might be in the public interest; the policy document compares the new powers and TPR’s existing moral hazard powers.)
- There is no limitation period for these powers.
- TPR says that evidence pre-dating the commencement date of the new powers “may be relevant” to their investigations.
- TPR expects the basis for the reasonable excuse to be clear from contemporaneous records such as minutes of meetings, correspondence and written advice. Three key factors are highlighted: was the detrimental impact an “incidental consequence” or a “fundamentally necessary step to achieve the person’s purpose”; does any mitigation fully compensate for the loss; and if not, is there a viable alternative that would have avoided or reduced the detrimental impact? Importantly, TPR recognises that a party can have regard to its own interests.
- In terms of when TPR is likely to prosecute, factors include whether the parties have complied with the notifiable events regime and the openness and timeliness of communication with TPR. Other factors could include whether or not significant financial gains have been “unreasonably made” to the detriment of the scheme; if there is “some other unfairness” in the treatment of the scheme; or if TPR / the Pension Protection Fund have not been appropriately informed.
It is worth noting that the new offences can also be used by the Secretary of State or the Director of Public Prosecutions (or equivalent in Scotland and Northern Ireland). Also, they could adopt a different approach in terms of what merits investigation and prosecution.
Should we be concerned?
Although the new offences are not expected to frustrate legitimate corporate activity, the provisions in the Act significantly strengthen TPR’s powers. Trustees, employers and others involved in DB) pension schemes, if not concerned, certainly need to be aware of the changes. Considerations (starting now and not just when the provisions enter into force) include:
- Taking the provisions into account in a transaction that could potentially impact a DB scheme or the covenant of its sponsor.
- Checking trustee insurance policies and indemnities.
- Taking advice and keeping a good audit trail.
- Obtaining training on TPR’s new powers.
To leave the last word with the entity that is most likely to use the new powers:
“…it is not a piece of legislation to be feared, except by the minority of wrongdoers. Rather, it will deter wrongdoers from doing wrong, and will allow us to prosecute those who knowingly do harm to savers. That is something we can all welcome.”
David Fairs, Executive Director of Regulatory Policy, Analysis and Advice, TPR