New Pensions Act offences have ‘far reaching implications for corporate Britain’

LCP has sounded the alarm that new powers for the Pensions Regulator under the Pensions Schemes Act 2021 – due to receive Royal Assent in the coming weeks- will have far reaching implications for corporate Britain with directors, lenders and even trustees potentially being made unwittingly criminally liable.

The c.5,000 businesses in the UK with Defined Benefit Pension Schemes are in the scope of the new legislation. It is not a matter purely for the pensions manager, CFO or pension trustees at these businesses. The new powers need to be on the radar of all key decision makers to avoid potential fines and/or jail time as a result of financially material business decisions which they are party to.

Evidence that the new powers will be used by the regulator can be seen in the impact assessment prepared alongside the Act. This shows that there is an expectation that up to 50 civil sanctions will be issued per year and up to 5 criminal convictions per year – with up to 2 of these leading to custodial sentences.

DWP’s March 2018 White Paper outlined the Government’s intention to ‘target individuals who wilfully or recklessly mishandle pension schemes, endangering workers’ pensions.’ LCP warns that the criminal offences and civil penalties laid out in the new Pension Schemes Act will have a much wider scope and will cover a broader range of corporate activity than was originally outlined in the white paper.

While more detailed regulation and guidance from the Pensions Regulator (TPR) is expected to be published before the TPR’s new powers become effective, LCP are warning that sponsors, trustees and advisers will need to understand the implications of these new powers now.

According to LCP, particular areas of concern in the Act that could have significant and far reaching implications for the UK pension system are:

• The new ‘conduct risking accrued benefits’ offence is potentially very wide reaching.

  Those caught by the criminal offence can include people who ‘knew or ought to have known’ that their conduct could impact the scheme rather than those who have acted recklessly. A plain reading of the law means that even those undertaking what has previously been normal business activity, could potentially be caught. This could include a Director signing off a large dividend if some cash is not also contributed to the DB scheme. Or the finance team involved in a corporate restructure that moves assets or business away from the reach of a pension scheme. A lender requesting additional security to provide increased lending to a struggling company with a DB scheme could also fall foul of the new offence. There is even the risk of a £1 million personal fine or custodial sentence for trustees if it were judged that their action (or inaction) ultimately reduced the likelihood of members receiving their benefits – for example perhaps in hindsight they were not prudent enough in the use of some of their powers.

• While TPR already has power to impose Contribution Notices on companies and directors to require them to make cash payments to a scheme, the circumstances in which they can do this are currently very narrow.

  The Act broadens this power substantially by introducing two new Contribution Notice tests which are more objective in nature. In some cases what has previously been considered normal business activity (such as material restructuring or dividend decisions) may breach these new tests. This means that for a much wider range of corporate activity there will be a need for a clear audit trail of the process of ‘reasonable’ decision making – and clear supporting analysis to show how the pension scheme has been considered and, where relevant, provided with extra cash or guarantees.

Laura Amin, Principal at LCP, commented: “Directors and others will need to take action to ensure they avoid falling foul of the new TPR powers around Contribution Notices. Many will also be concerned about the threat of jail or a fine if they are unintentionally involved in something is judged to have weakened a company’s support for the pension scheme. Responding to these new rules appropriately will be particularly challenging for those businesses who are struggling to recover from Covid-19, or are badly hit by Brexit. “It’s clear that there are lower thresholds for the criminal offences than previously proposed and it means that a wider scope of people could be liable for actions taken unwittingly.

Alongside this there is the need for extra governance and documentation to demonstrate that all parties have acted reasonably vis a vis the pension scheme in making material business decisions. The expectations of shareholders and lenders may also need to be managed as these stakeholders may have to prioritise pensions more than they have done so in the past. “We await the Regulator’s guidance with interest, but it seems to us that Trustees will have to have increasing involvement in discussions around some routine business activities. Under the new Act, corporates cannot afford to see pensions as a separate issue and it will be vital for them to be able to show how the pension scheme has been considered as part of their decision-making processes.”