45: Pensions Regulator sets out its approach to prosecuting the new criminal offences
On 11 March 2021, The Pensions Regulator (TPR) initiated a consultation on how it intends to exercise its new criminal prosecution powers under the Pension Schemes Act 2021. These powers are not in force yet but the expectation is that they will start to apply from October 2021.
Once in force, TPR may deploy its new prosecution powers where a person commits, without reasonable excuse, an ‘avoidance of employer debt’ offence or the offence of ‘conduct risking accrued benefits’ (the Offences). Unlike TPR’s power to impose contribution notices (CNs) under the existing moral hazard regime, there are few restrictions on who can be prosecuted for these Offences. Successful prosecution may result in an unlimited fine, a seven year prison sentence (or both).
From the perspective of many stakeholders in the pensions industry, the introduction of these new powers has generated considerable concern due to the eye catching penalties, the breadth of regular business and pension scheme activity they could affect and the vagueness surrounding the meaning of ‘reasonable excuse’ in respect of these Offences.
The consultation includes TPR’s draft policy which provides some key messages to try and calm the nervousness within the pensions industry about the introduction of the Offences.
The policy starts with a statement that the new prosecution powers are aimed at the more egregious conduct that is already within the scope of TPR’s CN powers and are not seeking to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour in the UK. The examples in the policy follow this theme and suggest that TPR is only looking to prosecute particularly egregious behaviour where it considers an example needs to be set to deter similar behaviour in the future.
From a commercial perspective this makes sense. Moreover, prosecutions will incur public resources and, unlike amounts paid under a CN which will be paid to (and thus aid) the pension scheme or the PPF, fines paid on conviction of one of the offences will end up in HM’s Treasury.
Joined at the hip with the CN regime
TPR states that its approach to prosecution will be closely linked to its CN power insofar as it would expect to consider a case for prosecution in broadly the same circumstances that it would consider seeking a CN. Much of the policy is then devoted to comparing the new prosecution powers to TPR’s existing CN regime and TPR demonstrating that the two regimes have much in common (albeit with some notable differences).
Interpretation of the reasonable excuse requirement
The draft policy explains that TPR will need to prove that the accused had no reasonable excuse for committing the Offence. Notwithstanding this burden on TPR, TPR states that it expects that the basis of any reasonable excuse ought to be clear from contemporaneous records such as minutes of meetings, correspondence and written advice.
The policy also sets out the following three factors against which it will test an excuse to determine whether it is reasonable:
- connection – the more incidental the detriment was to the accused’s purpose, the more that purpose would tend toward a reasonable excuse;
- mitigation – where any detrimental impact on the scheme has been fully mitigated, the accused will more likely have a reasonable excuse; and
- alternatives – where no or inadequate mitigation was provided but there was no viable alternative which would have avoided or reduced the detrimental impact on the scheme then this would tend toward the accused having a reasonable excuse.
Under the Act, there is a general exemption for insolvency practitioners so they cannot be prosecuted for one of the Offences, although this exemption will not cover any pre-appointment advice. Other professional advisers do not have the benefit of any exemptions from prosecution in respect of the Offences. However, the draft policy states that provided the professional acts ‘in accordance with their professional duties, conduct, obligations and ethical standards applicable to the type of advice given’ they are likely to have a reasonable excuse.
Don’t look back in anger
Before the Act received Royal Assent, the Pensions Minister provided written confirmation that none of the provisions in part three of the Act concerning TPR’s powers would be retrospective. However, TPR’s policy seems to blur the boundaries on this. The policy states:
‘Evidence pre-dating [1 October 2021] may be relevant to our investigation / prosecution of actions after that date, for example if it indicates someone’s intention’.
The inference here is that prior conduct may be a driver for TPR to bring a prosecution, albeit there would still need to be an Offence that occurred after the commencement date before TPR could bring any prosecution. This will certainly be an area to keep an eye on as the consultation progresses.
TPR’s guidance provides a steer on how it intends to wield its new prosecution powers. It gives some helpful indications of the types of poor conduct that will become the focus of those powers along with some clarification about what might be construed as a reasonable excuse for conduct that might otherwise fall within the scope of the Offences. The general theme is that TPR is only likely to use its powers to target particularly egregious behaviour.
The draft policy has its limits though. It is not binding. The court will be the arbiter of what is and what is not a reasonable excuse, not TPR. The examples in the policy of egregious behaviour are at the more extreme end (they amount to asset or value stripping of a scheme employer) and the examples of where an individual may have a reasonable excuse are relatively obvious. The policy does not delve into more nebulous areas, such as the degree to which an individual’s actions might be classed as resulting in the unfair treatment of the pension scheme. The policy is only relevant to TPR and it is important to remember that other bodies can prosecute the offences.
Notwithstanding the limitations of the draft policy, all those involved with defined benefit pension schemes (even tangentially) should consider the Act and the draft policy carefully, consider providing their feedback on the consultation and monitor the progress and outcome of the consultation. The consultation will close for comments on 22 April 2021.