Hogan Lovells

The Pension Schemes Bill [HL] 2019-20 (Bill) was re-introduced before Parliament on 7 January 2020. Among its proposed amendments to the Pensions Act 2004 (Act) are new criminal  offences for failing to comply with a contribution notice, avoiding employer debt, conduct risking accrued scheme benefits, an expansion of the moral hazard powers and an extension of the ‘notifiable events’ framework. The Government’s stated intention is to “ensure that those who put pension schemes in jeopardy feel the full force of the law“.  Unfortunately, scope of the amendments is such that if enacted without amendment, they are very likely to deter responsible directors from attempting to restructure financially distressed employers facing significant exposure to defined benefit pension scheme liabilities.

Background to the Bill

Since its introduction in 2005, the role of the Pensions Regulator (tPR) has been, among others, to intervene to ensure that defined benefit (DB) pension schemes are sufficiently funded by their sponsoring employers to meet their liabilities as they fall due. TPR also has a statutory objective to reduce claims on the Pension Protection Fund (PPF).  The PPF provides compensation to members of insolvent employer’s underfunded pension schemes.

The high profile insolvency of BHS in 2016 involving a £571 million DB pension deficit, and subsequent insolvencies including Carillion in 2018 involving an aggregate £800 million DB pension deficit, exposed perceived limitations in tPR’s ability “proactively to prevent harm to pension schemes and punish reckless behaviour“. The Government’s White Paper “Protecting Defined Benefit Pension Schemes” published in March 2018 recognised that tPR’s powers required strengthening in order to ensure increased levels of protection for DB scheme members.

The Government confirmed its intentions to (i) to give tPR the power to punish those who deliberately put their pension schemes at risk, (ii) to impose criminal sanctions on those found to have committed “wilful or grossly reckless behaviour in relation to a pension scheme” and (iii) to extend the existing notifiable events framework and voluntary clearance regime to enable employers to have appropriate regard to pension considerations in any relevant corporate transactions.

Following public consultation on a number of its White Paper proposals in June 2018, the Government published its consultation response “Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator” in February 2019.  Here, the Government confirmed that proposals for increased oversight of corporate transactions, improved regulator powers and anti-avoidance powers would be taken forward into legislation.

The Bill

The Bill was originally published on 16 October 2019 and re-introduced before the House of Lords in substantially the same form on 7 January 2020. The following amendments to the Act proposed by the Bill are of central interest to the restructuring community:

Expansion of the Moral Hazard Regime

The anti-avoidance regime was introduced under the Act in order to extend liability for any DB scheme deficit to the scheme employer and persons “connected with, or an associate of, the employer“. Pursuant to s.38(5)(a) of the Act, tPR may issue contribution notices (CNs) in certain circumstances, including where the target is a party to an act or a deliberate failure to act which “detrimentally affected in a material way the likelihood of accrued scheme benefits being received” (known as the “material detriment” test under s.38(A)) or where the main purpose or one of the main purposes of the act or failure to act was to prevent the recovery of the whole or any part of a s.75 debt, to prevent such a debt becoming due or to compromise or reduce the amount of such a debt which would otherwise become due. A “s.75 debt” will arise under s.75 Pensions Act 1995 where the employer enters an insolvency process and immediately prior to the commencement of the insolvency process the value of the pension scheme’s assets is less than its liabilities (calculated on an annuity buy-out basis). A s.75 debt will arise in other circumstances as well including the withdrawal of the employer from a multi-employer DB pension scheme.   The recipient of a CN is required to contribute financially to any shortfall.  The amount required can be any amount up to the s75 debt.

The Bill provides for s38(5)(a) of the Act to be amended to include two new limbs to the ‘material detriment’ test:

  • Employer insolvency test (s38(C)): this will be met in relation to an act or failure to act if tPR is of the opinion that (a) immediately after the relevant time, the value of the assets of the scheme was less than the amount of the liabilities and (b) if a s75 debt had fallen due from the employer to the scheme immediately after the relevant time, the act or failure would have materially reduced the amount of the debt likely to be recovered by the scheme.
  • Employer resources test (s38(E)): this will be met in relation to an act or failure to act if tPR is of the opinion that (a) the act or failure reduced the value of the resources of the employer and (b) that reduction was a material reduction relative to the estimated s75 debt in relation to the scheme.
  • These new grounds are likely to cause difficulties in employer restructurings since they focus on the strength of the employer’s covenant i.e. its ability effectively to underwrite the scheme (which may of necessity be reduced by the terms of any restructuring). It will be a defence for the target to show that it gave due consideration to the impact of the act or failure to act and concluded reasonably that the act or failure to act would not materially reduce the debt or the value of the employer’s resources or took reasonable steps to eliminate or minimize the impact. Given the inherent difficulties posed by these new grounds when structuring a deal and the risk of stakeholders incurring criminal and civil liabilities if they do arise (as detailed further below), it is anticipated that parties may be unwilling to proceed with restructurings without first seeking assurances, via the existing voluntary clearance regime, that tPR will not use its anti-avoidance powers to issue applicants with CNs.


The Bill proposes three new criminal offences derived from the moral hazard regime. Failure to pay the debt due under a CN without reasonable excuse will be punishable by unlimited fines in England and Wales (s42A). Moreover, a person who does an act or engages in a course of conduct without reasonable excuse which (i) detrimentally affects in a material way the likelihood of accrued scheme benefits being received (s58(B)) or (ii) whose act or failure prevents the s75 debt (including a contingent debt) becoming due, being recovered or being compromised (s58(A)), is punishable by seven years in prison and/or unlimited fines.

However, in contrast to the moral hazard regime which applies to employers and those ‘connected or associated’ with them, the criminal offences under s58(A) and s58(B) may be committed by any person (subject to limited carve-outs for insolvency practitioners). Hence any parties involved in a proposed restructuring, including lenders, professional advisors, and purchasers risk incurring criminal liability for their actions. While defendants must be acting “without reasonable excuse”, to be convicted, the Bill offers no clarification of what may constitute “reasonable excuse”.

Even where criminal liability is not attributed, parties to transactions may also run the risk of incurring civil liabilities of up to £1,000,000 under the new financial penalty regime proposed by the Bill if they are party to any of the circumstances under sections 42(A), 58(A) or 58(B).

The prospect of directors facing increased risks of criminal or civil liability for supporting restructuring plans which expend company resources for trading purposes may make those directors decide that it is safer to cease trading, rather than taking the calculated gamble of continued trading in the hope of implementing a rescue. That outcome cannot (and should not) be allowed to result from the enactment of the Bill.

Extension of the Notifiable Events Framework

Pursuant to s.69 of the Act, ‘appropriate persons’ must give notice to tPR of any ‘notifiable event’ which occurs relating to an eligible pension scheme or employer.   They must do so, as soon as reasonably practicable after the event. ‘Appropriate persons’ include trustees or managers of pension schemes and employers.  Notifiable events include any decision by the trustees or managers to take action which will result in any debt which is or may become due to the scheme not being paid. Failure to notify the event may result in civil penalties of a maximum of £5,000 for individuals and £50,000 in all other cases.

The Bill proposes to replace the existing penalty regime with the new financial penalty scale under s88(A) of the Act. That new scale will, if enacted, broaden the range of ‘notifiable events’ and the scope of ‘appropriate persons’ who may be held liable for any failure. The new regime would enable tPR to issue penalties of up to £1,000,000 for any failure to notify against all or any of the employer, a person connected with the employer, an associate of the employer and any other prescribed person.

The details of the further notifiable events are not contained in the Bill and will be set out in secondary legislation. Based on the White Paper consultation, it is anticipated that they will include all or any of the sale of a material proportion of the business or assets of a scheme employer which has funding responsibility for at least 20% of the scheme’s liabilities and the grant of new security on a debt to give it priority over the scheme debt. If prior notice of such events is required, this could delay actions which might otherwise preserve value in the employer for the benefit of the scheme.


The amendments to the Act proposed by the Bill introduce further elements of uncertainty into an already complex area of restructuring. Given the significant risks for the parties involved, it is possible that rather than serving to improve levels of protection for DB scheme members, the amendments, if enacted in their current form, could instead increase the likelihood of underfunded schemes entering into the PPF. This could be the result of company management and creditors deciding that formal insolvency with an immediate cessation of trading posed fewer risks to stakeholders than a rescue attempt supported by continued trading.

Members of the restructuring and insolvency profession have commenced a vigorous lobbying process is now under way. It is to be hoped such lobbying results in the Bill receiving appropriate amendments to address the matters referred to in this note. Only then will the Bill draw the correct balance necessary both to promote corporate rescues and reduce the scope for unscrupulous directors to take advantage of the pension creditor constituency.

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