Can you rely on the Pensions Regulator’s guidance to keep you out of jail?

Following much industry anticipation, TPR has released its draft guidance on how it will decide whether to prosecute people under the two new criminal offences in the Pension Schemes Act 2021.

The guidance is intended to give some comfort that TPR is not looking to prosecute ’accepted standards of corporate behaviour’ and the guidance sets out some rather extreme examples of when TPR may look to prosecute under the new offences – which seem reasonable. (Indeed some of the examples sound familiar given recent high profile pension failures and subsequent TPR investigations!)

However, the guidance also references the intended ‘deterrent effect’ of these new offences and says that the use of TPR’s powers to prosecute under these offences will ‘act as a warning to others’. And after all the work to acquire these powers, and with the backdrop of cases such as BHS and Carillion, my view is that the implication is that TPR will want to make an example out of the first cases.

A reminder of and the backdrop to the guidance and why it is of concern

The two new criminal offences introduced in S107 of the Pension Schemes Act 2021 could potentially apply to a wide range of activity (both directly and indirectly related to a DB pension scheme). There has been much industry concern about the scope of these offences – given the potential for these offences to have significant and far-reaching implications to the UK pension system as we know it – beyond the realm of corporate restructuring and dividend policy.

Pensions Minister Guy Opperman has previously portrayed the purpose of these new TPR powers as being to go after “bosses who plunder” pension funds. But the new offences exceed that limited scope. The new “conduct risking accrued benefits” offence potentially draws into scope any activity which reduces the value of a business that sponsors a DB pension scheme – and as a result materially reduces the likelihood of the scheme benefits ultimately being received by members.

This has led to much industry debate and concern – read the blog written by the PLSA Chair on this specific point.

And so following Royal Assent of the Act in February, we have been eagerly anticipating TPR’s guidance on how these new criminal offences will be used by TPR and whether it will change the circumstances in which TPR will act.

What’s new (and not so new) in terms of how TPR will assess whether to act?

If TPR considers someone has done something that has put pension scheme benefits at risk, the new criminal offences put the burden on TPR to establish that a person did not have a ‘reasonable excuse’ to act in the way they did, under the circumstances.

Therefore, the person facing prosecution will be keen to show that they did have a ‘reasonable excuse’ for their action (or inaction) at the time.

This elevates the need for company boards and finance teams to be able to point towards the audit trail of the process they went through to identify the risk to the pension scheme of any business activity they were considering. This would need to include the steps taken to understand the impact on the scheme and to consider appropriate mitigation (examples of ‘adequate’ mitigation are given in the guidance, eg a like for like replacement of a group guarantee under a transaction scenario). Companies are likely to need specialist pension covenant advice in more circumstances to establish what may be considered as ‘adequate mitigation’ and companies will need to set out clear documentation of their decision-making process.

From a closer inspection, it’s clear that the guidance assumes all parties are already well versed in the statutory defence in relation to TPR’s current Contribution Notices. This will be key for those facing prosecution to confidently establish that they had ‘reasonable excuse’.

While there is alignment with the existing Contribution Notices, TPR is also keen to bring out the areas where they differ – the obvious areas being the scope of the new offences (which apply to a much broader range of people - as per the guidance ‘anyone other than an Insolvency Practitioner’ is in reach).

And what about those in scope?

TPR says it will be focussing on people who have significant decision-making power but this does not exclude the possibility of those who ‘helped or encouraged’ the behaviour also being prosecuted.

Advisers working within the realms of their professional requirements are, according to TPR, not going to be at risk. Whilst this is a helpful and expected position, it will be important for all advisers to ensure that they don’t cross the boundaries into areas where they are not experts when advising in this area.

There isn’t much detail in the guidance on implications for trustees – and none of the examples provided are focussed on specific trustee-led action (or inaction). Does TPR assume all trustees are well-advised (with appointed specialist covenant advisers too?) and that trustees fully understand the full implications of the powers they may have under their pension scheme rules (eg a wind-up power?)

Additional factors are listed in terms of when TPR may consider bringing a case, including the extent of communication and consultation with the trustees. It is likely to be mutually beneficial for trustees and sponsors to engage early, with details of the corporate activity being shared with trustees well in advance of the activity taking place. Information Sharing Agreements between trustees and sponsors (with appropriate Non-Disclosure terms where needed) will likely be useful in this context, where not already in place.

When will the new offences ‘kick in’?

A possible 1 October 2021 start date is referenced for the criminal offences. TPR also indicates that evidence before that date may be relevant to their investigation/prosecution of actions after that date, for example it may indicate someone’s intention (and potentially negate a ‘reasonable excuse’ argument). This is interesting in the context of various ministerial promises of “no backdating” of the new TPR powers.

What are the implications?

The offences are supposed to have a deterrent effect, particularly given the personal risk they introduce of jail time (noting also the alternative financial penalty of up to £1m which could be imposed by TPR on an individual if a criminal prosecution is not pursued).

Given that TPR’s measure of what is reasonable assumes a high standard of corporate behaviour (spotting the pension implications of business decisions early, raising them with the trustees, liaising openly with TPR, and providing adequate mitigation to a pension scheme), the offences will likely require a step up in corporate thinking and behaviours in many cases if parties want to really mitigate the risk of possible investigation and prosecution (or the £1m financial penalty).

In short, corporate Britain cannot afford to relax and needs to make sure that all key business decisions are seen through a pensions lens and go through a proper and well documented decision-making process.

Will the guidance allay concerns?

So are my concerns allayed by this guidance? Not really… What seems defensible today may look very different through the lens of history, especially if things go wrong further down the line. And the guidance is clear that the statutory limitation period which applies to Contribution Notices does not apply to the criminal offences. Actions taken today may be judged very differently by a court in 10 years’ time.

When it comes to it, guidance is only guidance – TPR is perfectly at liberty to change its mind or take a different position if attitudes change. Also, as it notes itself, it isn’t the only one that can bring a prosecution. The Director of Public Prosecutions can do so, and even private individuals might (although the DPP can and usually does take over any private actions). In the high profile, high-emotion area of pensions, who is to say whether we will be looking at a range of prosecutions outside this guidance in the future.