65: Pension Schemes Act 2021: New criminal offences and contribution notice powers come into force

On 1 October 2021 key provisions of the Pension Schemes Act 2021 (the Act) came into force. These provisions boost TPR’s powers in relation to defined benefit schemes, with new criminal offences, changes relating to contribution notices and new information gathering powers.

TPR’s policy on its approach to the use of the new criminal offences was issued on 29 September and it is currently consulting on the use of its other new powers. These policies will provide important context for companies and trustees trying to understand the impact of the new powers on corporate activity.

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 scheme including trustees, corporates, lenders and professional advisers, except for appointed insolvency practitioners acting in that capacity.

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).

Reasonable excuse

As noted above, reasonable excuse forms a central defence to the new criminal offences and TPR’s 29 September policy sets out its approach to reasonable excuse.

The burden is on the prosecution to prove the absence of a reasonable excuse. What amounts to a reasonable excuse in any particular case will be fact-specific. TPR will take into account each person’s reasons for acting as they did, the circumstances of the act and the circumstances of the individual, including their duties, skills and experience.

TPR also sets out three factors which it considers will be significant in determining whether there is a reasonable excuse for the act or course of conduct:

• connection – how incidental the detriment was to the act or omission;
• mitigation – the extent to which the detriment was adequately mitigated; and
• alternatives – where no or inadequate mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact.

Each will be given the weight that TPR considers appropriate in the context. TPR states that while the offences will not apply retrospectively, evidence pre-dating their commencement may be relevant to its investigation or prosecution.

Contribution notices

The Act introduces two new grounds where the TPR can impose a contribution notice. The two new tests for a contribution notice are:

• the ’employer insolvency test’ – broadly this will be met if as scheme was in deficit at the time of an act and TPR considers the 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, in respect of which there is also an amendment permitting TPR to take into account the effect of the target’s act or failure to act on the pension scheme’s assets or liabilities.

There are also changes to the relevant time at which TPR estimates the debt in order to inform the prospective contribution notice – it will now be the end of the scheme year most close to the date TPR issues its determination, rather than the date the triggering event occurred.

Inspection and interview powers

As well as the power to prosecute, TPR will have broadened inspection and interview powers. These will enable 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.

Civil penalties of up to £1 million for provision of false or misleading information to TPR or the trustees are now in force, together with fixed and escalating penalties for failure to comply with a requirement of TPR under its information gathering powers.

Notifiable events and the statement of intent requirement

TPR now has the power to impose a financial penalty of up to £1 million for failure to comply with the notifiable events requirements of section 69 Pensions Act 2004 (replacing its existing power to impose penalties under section 10 Pensions Act 1995).

Consultation remains ongoing in respect of the two new notifiable events that will sit alongside the existing regime together with the new statement of intent requirement, which will apply to the new notifiable events and one existing notifiable event. The details of these are set out in the DWP’s consultation published on 8 September 2021 and are not yet in force.

Comment

TPR’s policy on the new criminal powers makes clear the vast majority of people do not need to be concerned – it doesn’t intend to prosecute ordinary commercial activity. Instead it will investigate and prosecute the most serious examples of intentional or reckless conduct that already fall within the scope of its contribution notice regime (or would do if the person was connected with the scheme employer).

The concern is that the new offences do ostensibly capture some ordinary commercial activity and until understanding develops and the details of TPRs approach are refined, corporates and trustees are likely to need advice on the extent to which an activity falls within the new powers and the steps that can be taken to mitigate any risk. It will be helpful for all parties to get out ahead of these new considerations at an early stage in order to avoid delays to corporate activity.

Communication and transparency are likely to be key and may require corporates to adapt some of their decision making processes. In addition corporates and trustees will need to understand the scope of the new powers so that they can keep an audit trail of decision-making and ensure that audit shows the decisions were appropriate in the context of those powers.

Contact

If you require any assistance with these issues or any pensions matter contact our legal experts here BDB Pitmans pensions team.