The Pension Schemes Act 2021 (Act), which came into force on 11 February 2021, introduced new criminal offences to bolster the Pensions Regulator's moral hazard regime. Most notably, it will now be a criminal offence to engage in activity that has a materially detrimental impact on scheme benefits. The offence is punishable by an unlimited fine and up to seven years in jail. This offence operates alongside a civil penalty of up to £1 million.
In this article, we take a closer look at the Pensions Regulator's powers to impose criminal sanctions under the Act and how concerned companies with defined benefit (DB) schemes, and the trustees of those schemes, should be.
New criminal offences under the Act
Under the Act, the following will now be criminal offences:
- Engaging in activity that has a materially detrimental impact on scheme benefits. The offence carries the risk of an unlimited fine and up to seven years in jail.
- An act or failure by a person intended to prevent the recovery of a Section 75 debt1 (being the deficit in the scheme measured on the basis that members' benefits are secured with an insurance company). A person found guilty could face up to seven years' imprisonment or an unlimited fine.
(Note: a person in this context can be anyone (including the employer, the scheme trustees and their advisers) unlike the Pensions Regulator's moral hazard powers which are exercisable only against an employer participating in the scheme or anyone connected or associated with the employer).
- Failure to pay sums due under a contribution notice. The offence is punishable by an unlimited fine.
- Providing the Pensions Regulator with information which is materially false or misleading in relation to prescribed matters. A person found guilty of this offence could be faced with a fine and/or up to two years in prison.
The offences, when implementing regulations bring them into force (which is expected later this year or early next year), are intended to significantly strengthen the Pensions Regulator's ability to police its "moral hazard" powers. A defence of reasonable excuse, however, is available in relation to the (above) offences.
Whilst this article focuses on prosecutions by the Pensions Regulator, prosecutions may also be brought by the Secretary of State, or by or with the consent of the Director of Public Prosecutions.
The Pensions Regulator's moral hazard powers – a recap
Under the Pensions Regulator's "moral hazard" or "anti-avoidance" powers, the Pensions Regulator has the power:
- to require a company or a person to pay a specified sum of money into the pension scheme (Contribution Notice or CN)2; and
- to require a company to provide some form of financial support to the scheme, such as a company guarantee (Financial Support Direction or FSD).
In either case, the Pensions Regulator must consider it "reasonable" to exercise its powers. These powers are exercisable against anyone that is "connected" with or is an "associate" of an employer participating in the scheme. Connection/association for these purposes in part looks at whether the person has "control" over the employer (but the concepts, taken from UK insolvency legislation, are drawn very widely). It is also worth noting that the Pensions Regulator applies a look-back period to the use of its powers. This means that exposure exists for a period of time after the connection/association ceases – six years in the context of a CN and two years in the context of an FSD.
The new criminal sanctions apply more widely. Criminal sanctions under the Act may be brought against the employer but also the scheme trustees (who are outside the scope of a CN or an FSD), their advisers and lenders (although there is a general exemption for insolvency practitioners). Any sums payable under the moral hazard regime (for example, under a CN) are payable into the pension scheme. The moral hazard powers are not considered to be penal in nature, whereas the criminal sanctions clearly are penal, with the government's aim being to punish wrongdoing and for this to act as a deterrent to others.
Existing criminal offences under pension legislation
Criminal sanctions for breaches of pension legislation are not new. Pension legislation already includes a number of criminal offences, including:
- A "wilful" failure by an employer to comply with its auto-enrolment duties.
- Investing more than 5% of a pension scheme's resources/assets in the employer.
- Failure by trustees, their advisers and sponsoring employers to inform the Pensions Regulator of breaches of legal duties that are likely to be of material significance to the Pensions Regulator in the exercise of its power.
- Failure to comply, without reasonable excuse, with certain requests for information from the Pensions Regulator or failing to attend an interview with the Pensions Regulator.
Just paper power?
The power to impose criminal sanctions is not just "paper power". There have been a high number of successful convictions by the Pensions Regulator.
In December 2017, a healthcare company and its managing director faced charges of wilfully failing to comply with their auto-enrolment duties and knowingly or recklessly providing false or misleading information to the Pensions Regulator – a false declaration of compliance had been submitted to the Pensions Regulator that the company had enrolled 25 staff into an auto-enrolment compliant scheme. This led to convictions against the company and its managing director in the Brighton Magistrates' Court (and subsequently a total fine of £14,624 was imposed).
In June 2018, a recruitment company, some of its directors and senior staff pleaded guilty to unauthorised access to computer data, contrary to section 1(1) of the Computer Misuse Act 1990. The directors had encouraged senior staff to impersonate a number of temporary workers in order to opt them out of NEST (a government-backed scheme in which employers can participate to comply with their auto-enrolment duties). Sentences were given by the Crown Court. The company was ordered to pay a £200,000 fine (reduced on appeal to £100,000) and £60,930 in costs. Custodial sentences were also handed down to the company's directors and senior staff, including four-month prison sentences suspended for two years and 200 hours of community service.
Pension scheme trustees are not immune from criminal proceedings brought by the Pensions Regulator. In one case, a former trustee was ordered to pay £6,500 in fines and costs for refusing to comply with an information notice from the Pensions Regulator. In June 2019, an accountant (who was the trustee and an administrator of a pension scheme) was jailed for more than three years for breaching the restrictions on employer-related investments by using pension scheme funds to make prohibited loans.
More recently, in January 2020 the Pensions Regulator exercised its anti-avoidance powers by ordering the former owner of BHS to pay £9.5 million into the BHS pension schemes and prosecuted him for neglecting or refusing to provide documents without a reasonable excuse, contrary to the Pensions Act 2004.
How likely is the Pensions Regulator to seek a criminal conviction under the Act?
The new offences apply to individuals, corporate entities and pension scheme trustees. Advisers, including legal advisers, and lenders could also all be caught. The current thinking, however, is that the Pensions Regulator will, where possible, favour civil sanctions (over the criminal alternatives) for the following reasons:
- The burden of proof required for criminal proceedings, effectively requiring the Pensions Regulator to prove its case "beyond reasonable doubt", is higher than required in the context of civil sanctions.
- In civil proceedings, the Pensions Regulator must prove its case on the balance of probabilities that its case is true (i.e. that the occurrence of any event was more likely than not).
- Criminal proceedings have to be tried in a magistrates' court before a magistrate or a district judge, and in a Crown Court by a judge and a jury. Civil sanctions/penalties are, with some exceptions (such as failure to comply with the auto-enrolment duties), determined by the Determinations Panel of the Pensions Regulator.
- The Determinations Panel is well versed in pensions law. By contrast, a jury in a Crown Court, drawn from ordinary members of the public, will have little knowledge of pensions law and counsel acting for the Pensions Regulator will be faced with the challenges of having to explain complex pensions issues to a non-pensions specialist jury.
The Pensions Regulator's criminal sanctions policy
In March 2021, the Pensions Regulator published, for consultation, its draft policy on its approach to the investigation and prosecution of criminal offences under the Act. In the policy, the Pensions Regulator stated that its approach to the prosecution of the new offences would be closely linked to its existing moral hazard powers, in that it would expect to consider a case for prosecution in broadly the same circumstances where it would consider imposing a Contribution Notice. The policy also provided useful guidance on the factors the Pensions Regulator will consider when considering whether a party has a defence of reasonable excuse. Whilst helpful, there are some notable gaps in the guidance – the position of trustees, who generally are not within the scope of the moral hazard powers but will be within the scope of the new criminal offences, is not considered.
Position of employer and trustees
The potential scope of the new criminal offences is broad and the consequences for employer and trustees potentially severe. That said, given the legal and practical difficulties of bringing criminal sanctions, it is thought that the Pensions Regulator will reserve its criminal powers only for extreme cases, where there has been fraud or the pension scheme's assets have been clearly "plundered". Employers and trustees can also draw some comfort from a recent statement by David Fairs, the Pensions Regulator's Executive Director of Regulatory Policy, Analysis and Advice, which delivered the following message:
- The new powers require intent, an act and the absence of a "reasonable excuse". Together, these represent a high bar. The Pensions Regulator will always take an appropriate and proportionate approach.
- Competent trustees should therefore have no reason to resign in fear of these new powers.
- The new powers are not designed to potentially catch normal behaviour. Echoing the government's message, the Pensions Regulator's intent is not to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour in the UK.
That said, the Pensions Regulator has made it clear that it will use the new legislation to deter wrongdoers from doing wrong, and will prosecute those who knowingly do harm to savers. Employers and trustees cannot therefore afford to be complacent by any means. They should be mindful of the new criminal sanctions and keep abreast of developments in the area and the Pensions Regulator's final policy on how it intends to investigate and prosecute offences under the Act – it is hoped the final policy will deal more with the position of trustees.
Given its aims to be a "quicker, clearer, tougher" regulator, it is only a matter of time before we see a criminal prosecution by the Pensions Regulator under the new powers.
- A debt under section 75 or 75A of the Pensions Act 1995.
- The Act also introduces two further grounds on which the Pensions Regulator can impose contribution notices.