Government proposes new civil and criminal sanctions for wilful or reckless mismanagement of defined benefit schemes

On 11 February 2019, the Government published a response to its June 2018 consultation on strengthening the powers of the Pensions Regulator (TPR). A key proposal in the consultation was the creation of new civil and criminal offences to deter and punish wrongdoing and reckless behaviour in relation to defined benefit schemes.

At present, the sanctions available to TPR are relatively limited. For example, the maximum fine which can be imposed on an individual for non-compliance with pensions requirements is currently £5,000, and £50,000 for companies. The Government’s response to the consultation sets out details of the increased penalties and new criminal offences which it intends to take forward. These new sanctions could apply to anyone who has responsibility for a pension scheme, including sponsoring employers, any associated or connected persons, directors and trustees. It is therefore crucial that all those involved in the management of pension schemes understand the proposals.

Key changes include:

• a new criminal offence of wilful or reckless behaviour in relation to a pension scheme which will be punishable by a maximum penalty of up to seven years’ imprisonment and / or an unlimited fine. Examples of wilful and reckless behaviour given in the response include chronic mismanagement of the business, allowing unsustainable deficits to build up, and endangering schemes by taking huge investment risks. This will bring the penalty for mismanagement of pension schemes in line with penalties for fraud and insolvency offences;
• a new criminal offence of failing to comply with a Contribution Notice, punishable by an unlimited fine. TPR will also have the power to issue a civil penalty of up to £1 million for this offence; and
• a new civil penalty of up to £1 million for various other breaches which have resulted in harm to the pension scheme or have the potential to do so, including failure to comply with a Financial Support Direction or with the notifiable events regime, failure to comply with the requirements for a Declaration of Intent, and knowingly or recklessly providing false information to trustees or TPR.

Although the new criminal sanctions should act as a deterrent, enforcing them may not be straightforward in practice. For example, there is a higher burden of proof under criminal law and it may be difficult for TPR to obtain sufficient evidence of wrongdoing. There is also uncertainty surrounding the precise definition of ‘wilful’ and ‘reckless’ behaviour. It is therefore likely that the new civil fines of up to £1 million will be a more effective deterrent. The consultation response does not clarify how any fines collected will be treated, for example, whether they would go into the relevant scheme or to the Treasury.

The Government has also set out various measures to ensure that TPR and trustees have access to timely information in order to improve their corporate oversight. For example, the current notifiable events regime will be broadened; sponsors will be required to produce a Declaration of Intent prior to certain business transactions, such as the sale of a controlling interest in a sponsoring employer; and the anti-avoidance regime will be improved.

The Government has confirmed that it will continue to consult with stakeholders on the details of these changes. It is expected that the required legislation will be introduced in 2021, although no precise timescale has yet been announced.