38: Pension Schemes Bill: extension of the Pension Regulators powers

The Pensions Schemes Bill 2020 (the Bill) has now passed through both Houses and is waiting for Royal Assent before it comes into law this year.

The more controversial changes involve the extended Pensions Regulator (TPR) powers which include three new criminal offences, a tougher civil sanctions regime with the power to issue penalties of up to £1 million and strengthened inspection and interview powers. In this blog we take a very brief look at those new powers.

New criminal offences

Conduct which risks accrued scheme benefits

This offence is committed by a person who, without reasonable excuse, detrimentally affects in a material way the likelihood of scheme members receiving the benefits they have accrued, and the person knew or ought to have known that their actions (or failure to act) would have that effect.

This offence is broad in scope and can extend to anyone involved in the operation of a defined benefit (DB) scheme including trustees, corporates, lenders and professional advisers.

It carries a possible custodial sentence of up to seven years’ imprisonment and / or an unlimited fine; the government decided the penalty should be consistent with existing fraud and insolvency offences. In addition, a civil penalty of up to £1 million can also be imposed on a person who knowingly assisted a party to these offences as well as the person who is a party to the offence.

Avoidance of employer debt

A person will commit this offence if, without reasonable excuse, they intentionally prevent the recovery of part or the whole of an employer’s Section 75 debt.

The persons in scope and the maximum criminal and civil sanctions for this offence are the same as above.

Failure to comply with a contribution notice

This offence is committed by a failure to comply by a person who is subject to a contribution notice by a given date without reasonable excuse.

Failure to comply with a contribution notice can give rise to a maximum criminal penalty of an unlimited fine or a new civil penalty of up to £1 million for this offence (although that civil penalty will not apply if criminal proceedings are ongoing or if there has been a conviction).

Other civil penalties and offences

There will be new or increased civil penalties for other offences such as: failing to notify TPR of a notifiable event; knowingly or recklessly providing false information to TPR (eg via the scheme return); and knowingly or recklessly providing false information to DB scheme trustees under specified provision. The government will also introduce fines in relation to non-compliance or delays in providing information.

The Bill also will also make it easier for TPR to impose a contribution notice. Two new tests for a contribution notice include: the ’employer insolvency test’ – broadly this will be met if TPR considers an act would have materially reduced the likely amount of recovery of a s75 debt on a hypothetical insolvency immediately after that act; and the ’employer resources test’ – which will be met if TPR considers an act reduces the value of the employer’s resources in a material way relative to a hypothetical s75 debt.  Both are subject to reasonableness.

Inspection and interview powers

As well as the power to prosecute, TPR will have broadened inspection and interview powers. These will enabling inspectors to enter any premises where documents or records are kept which are relevant to the exercise of any of TPR’s functions.

The interview power can require any trustee, member, professional adviser or employer to attend an interview in respect of any matter relevant to the exercise of any of TPR’s functions. The government intends that the interview power would override an adviser’s duty of confidentiality to their client.

These information gathering powers will be further enhanced by changes to the notifiable events regime, with changes to the notification requirements in respect of timing, effect and subsequent changes to the relevant event, as well as introducing new corporate transaction events that will trigger a notification requirement (to be set out in regulations).

Comment

While they offer greater potential protection for DB scheme members, the risk is that these new criminal sanction powers could capture normal corporate business and transactions. TPR will produce further guidance on the use of these new powers and has said it plans to undertake a consultation with the pensions industry. It is expected that this will include some detail on the reasonable excuse defence for these three criminal offences but with the ‘knew or ought to have known’ condition, ignorance of the law is unlikely to be enough. As such, the new powers may see an upsurge in clearance applications to TPR going forwards. While the Pensions Minister has confirmed that these new powers will be not be applied retrospectively, this will offer limited comfort.

In addition, there is likely to be a greater focus on corporate and scheme indemnity insurance and advisers will be carefully considering the terms of the services they provide.

The new TPR powers and other changes to be introduced by the Bill will have an impact on all persons involved in managing DB pension schemes and potentially on those engaged in business with sponsors of DB pension schemes. Risk management systems, staff training and effective systems for communication and reporting will be key once the Bill comes into force.

We will be providing more detailed analysis on the Bill in due course to help trustees and sponsors ensure that the new risks and challenges of the Bill are identified and successfully managed.