72: Consultation on the Pensions Regulator’s approach to new enforcement powers
Since the introduction of the Pension Schemes Act 2021 (PSA 2021) early last year, the Pensions Regulator (the Regulator) has consulted on its approach to using its new enforcement powers that can be found here. This was in response to a number of questions and concerns raised following the publication of its criminal offences policy in September 2021.
The consultation requests feedback on the following draft policies:
- overlapping powers policy;
- monetary powers policy; and
- information gathering powers policy.
Overlapping powers policy
The Regulator recognises it has the power to issue a statutory notice (other than a financial penalty), impose a financial penalty or bring a criminal prosecution and that these may all be available in certain situations, to greater or lesser extent. In choosing between powers in these circumstances, the Regulator will take into account the nature and effect of the powers and the outcome use of each might achieve.
The draft policy sets out a number of potential breaches and describes the approach the Regulator may take in each case, these include: breaches of legislation, breaches of a direction or restriction imposed by the Regulator, breach of the employer related investment prohibition, and avoidance of employer debt and / or conduct risking accrued scheme benefits.
The Regulator explains that it may take a staged approach in some circumstances, starting with statutory notices, moving to financial penalties and ultimately seeking criminal prosecution if the breach continues, but that other offences with aggravating factors may warrant the use of criminal powers first, backed up by regulatory powers.
Monetary penalty powers policy
Under the PSA 2021, the Regulator has the power to issue a financial penalty of up to £1 million in a number of circumstances. The draft policy describes how the Regulator will consider using that power and provides guidance on the way in which fines will be set. As an example of its approach, the Regulator states that non-payment of a contribution notice (CN) will attract a penalty value fixed at 20% of the CN value, capped at £1 million.
For avoidance of an employer debt or conduct risking accrued scheme benefits, the draft policy states the Regulator will take into account:
- the applicable ‘band level’ (this depends on the individual’s level of culpability and the harm caused to the scheme and saver outcomes); and
- any aggravating or mitigating features.
The range of financial penalties for each band will be as follows:
- Band HF1 – low culpability / low harm, £100,000 – £400,000;
- Band HF2 – high culpability / low harm, or low culpability / high harm – £250,000 – £650,000; and
- Band HF3 – high culpability / high harm, £400,000 – £1 million.
The Regulator has indicated the starting position for the penalty will be in the middle of each band, and it will then take account of any aggravating and mitigating factors that might be present.
Breaches of information gathering powers (such as failure to comply with the notifiable events regime without reasonable excuse or knowingly or recklessly providing false or misleading information to the Regulator) are also dealt with in the draft policy using the same bands, with the exception of a ‘Band R’ for breach of regulatory requirements with minimal harm to the scheme. This could result in a financial penalty of £0 – £100,000.
Information gathering powers policy
The draft policy sets out the types of information the Regulator may request in the course of its investigations. These types of information include trustee meeting minutes, scheme approved policies and procedures, scheme investment documentation, correspondence and advice among a longer non-exhaustive list of other items.
The Regulator has a number of information gathering options available to it, including interview notices (which enable the Regulator to compel people to answer questions), inspections (enabling the Regulator to enter relevant premises on giving reasonable notice) and warrants (permitting the Regulator to enter premises using reasonable force if necessary).
While its starting point may be a request for a person to voluntarily provide information, the draft policy also sets out how it will use its other powers, with reasonableness and proportionality a key driver throughout the Regulator’s decision making processes.
The final section of the draft policy explains the enforcement options available to the Regulator where an individual fails to comply with its information gathering powers, which include fixed and escalating financial penalties and in some cases, where there is a refusal or deliberation obstruction, the Regulator may seek criminal prosecution.
Trustees, employers and any individuals connected with defined benefit pension schemes will need to read and understand the finalised policies when they are published this year. Whilst the scope of the Regulator’s powers and consequences of non-compliance have been known about for some time since the PSA 2021 was introduced last year, what is less known is to what extent the Regulator will exercise these new powers in practice, and how often it will seek to enforce them.
The consultation closed for responses on 22 December 2021 and the finalised policies are expected in the early part of 2022.