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Criminal offences policy from the UK Pensions Regulator

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Siesage David
David Siesage

Associate

London

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28 October 2021

The Pensions Regulator (Regulator) has published its policy on the investigation and prosecution of two new criminal offences under the Pension Schemes Act 2021.  Of particular interest is the commentary and examples given on the meaning of 'without reasonable excuse'.  While the policy provides some insight on the Regulator's approach, there remain some concerns, including for lenders.

Two new criminal offences for improper conduct relating to defined benefit pensions schemes

The two new criminal offences, which came into force on 1 October 2021, are aimed at improper conduct in relation to defined benefit pension schemes: (i) avoidance of employer debt; and (ii) conduct risking accrued scheme benefits.

As discussed previously, the new offences have caused a stir in the pensions industry and beyond, given the broad scope of potential criminal liability (which could catch any person involved with a defined benefit pension scheme, however tangentially) and the limited nature of the possible defences.  The penalties are significant, including an unlimited fine and/or up to seven years' imprisonment, or a civil penalty of up to GBP1m.

There is concern that the new offences will have a chilling effect on many routine commercial and banking transactions, including in the restructuring sector.

The Pensions Regulator's criminal offences policy

The Regulator issued a draft policy for consultation in March 2021. Over six months and 49 consultation responses later, it has published its final policy.  While the substance of the final policy remains materially the same, the Regulator has sought to address some of the concerns raised in the consultation process, particularly by including a range of examples of potentially offending conduct.

The Regulator has sought to reassure those concerned by the scope of the new offences that the "vast majority" of people need not be concerned.  The Regulator will be focusing its efforts on investigating and prosecuting the "most serious examples of intentional or reckless conduct" that were already within the scope of their existing powers, rather than targeting "ordinary commercial activity".

The final policy also clarifies that the new offences do not have retrospective effect.  As such, conduct that took place before 1 October 2021 will not be caught by the new offences.  However, the Regulator may take into account facts from before that date as part of an investigation – for example, in establishing a reasonable excuse for the conduct under investigation or the intention behind that conduct.

Meaning of 'without reasonable excuse'

A key element in both the offences is that the accused either acted, or failed to act, 'without reasonable excuse'.

The final policy confirms that determining whether a person had a reasonable excuse is ultimately a matter for the criminal courts.  However, in the course of its investigation, the Regulator will need to form its own view on that question.  The Regulator will: (a) consider a person's reasons for acting in the way they did, and the reasonableness of those reasons; (b) take account of the circumstances in which the act took place (for example, whether there were any time constraints); and (c) take account of the person's own circumstances, including their duties, skills and experience and other relevant attributes.

The final policy explains that there are three factors which will be significant in the Regulator's assessment of whether a person has a reasonable excuse:

  • The extent to which the detriment to the scheme was an incidental consequence of the act or omission.
  • The adequacy of any mitigation provided to offset the detrimental impact.
  • Where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact.

The Regulator's assessment of reasonable excuse will also consider the extent of a person's communication and consultation with the pension scheme trustees, as well as a person's compliance with any fiduciary or professional duties.

Areas of remaining concern

While the final policy is a marked improvement to the consultation draft, some areas of concern remain.  For example:

  • The policy has no statutory effect and is therefore non-binding.
  • The policy's wording remains vague and the case studies are too simplistic to reflect the nuances of a fast-paced commercial transaction.  This means that the Regulator will have a very wide discretion in how it actually investigates and prosecutes the new offences.
  • The Regulator cannot grant clearance in relation to the new offences.  If clearance is granted for an upcoming transaction under the Regulator's contribution notice or financial support direction powers, that clearance will not automatically constitute a reasonable excuse for the conduct in question.
  • While there are examples in the policy which should provide some comfort to lenders, others appear to suggest that, in certain circumstances, the exercise of contractual rights by lenders could trigger an offence.  The Regulator has provided examples of where it considers there would be a less detrimental viable alternative (and therefore there is less likely to be a reasonable excuse).  These include where a lender is entitled to withdraw facilities immediately following a breach of banking covenants but could instead choose to extend them by a month which is highly unlikely to risk the lender's interests because the employer is entitled to significant payments from debtors over that period.
  • The final policy only sets out the Regulator's approach to the new offences – but both the Work and Pensions Secretary and the Director of Public Prosecutions (and separate agencies in Scotland and Northern Ireland) can also prosecute the offences.

What next?

The Regulator has issued for consultation draft policies covering the Regulator's: (i) overlapping criminal/civil enforcement powers; (ii) approach to imposing a set of new financial penalties (including the civil penalty discussed above); and (iii) information-gathering powers.  These policies, which are out for consultation until 22 December 2021, should help to add more flesh to the bones of the criminal offences policy.

 

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