Out-Law Analysis 3 min. read

Pension Schemes Bill: proposed criminal sanctions worry for trustees

Golden egg nest egg pensions

Proposed new criminal sanctions for UK pension trustees risk perverse outcomes if trustees become too risk averse to work with employers where schemes are in distress.

Clause 107 of the Pension Schemes Bill would, if passed in its current form, create two new criminal offences: avoidance of employer debt; and conduct risking accrued scheme benefits. These new offences would carry maximum custodial sentences of seven years.

The provisions are broadly drafted, and go far beyond the government's original intention to tackle wilful or reckless behaviour by employers sponsoring defined benefit (DB) pension schemes - including acts such as mismanaging a pension scheme, or deliberately running it into the ground. By tightening the wording, and potentially restricting those caught by the new rules to better align with those subject to the regulator's 'moral hazard' rules, the government could mitigate these unintended consequences.

Avoiding employer debt

The first offence arises if any person prevents the recovery of, compromises, or reduces a debt owed by an employer to the scheme, and intended their action to have that effect.

This language is vague, with "any person" potentially including professional advisers as well as trustees and employers. This is far wider in scope than those caught by the 'moral hazard' regime, which, broadly allows The Pensions Regulator (TPR) to pursue scheme employers and associated and connected persons.

Saunders Carolyn

Carolyn Saunders

Partner, Head of Office, London

The risk is that these new offences will lead to everyone involved with a DB scheme becoming overly cautious about their actions - from trustees to bankers, purchasers and advisers.

The offence comes with a defence of "reasonable excuse", but what amounts to a reasonable excuse is open to interpretation by the courts. In a criminal case, it would ultimately be for a jury - without specialist pensions knowledge - to decide whether a person had a reasonable excuse.

Another difficulty is that this wide wording would potentially catch many legitimate actions commonly undertaken by trustees. For example, trustees and employers often enter into various forms of apportionment arrangement when an employer leaves a scheme, under which the remaining employers agree to take on the liabilities of the departing employer. Although these arrangements are already regulated, they are not excluded from the scope of the offence.

Conduct risking accrued scheme benefits

The second offence arises where a person acts, or engages in a course of conduct, that detrimentally affects in a material way the likelihood of accrued scheme benefits being received, and the person knew or ought to have known that their act or course of conduct would have that effect. Again, there is a defence of reasonable excuse, but the same potential problems in respect of interpretation apply.

While the detriment must be "material", what this means is subjective. Also, the test of the ‘’likelihood’’ of scheme benefits being received is very wide. Any circumstances which result in a reduction in a scheme employer’s income could affect that likelihood - for example, a major customer of the employer deciding to withdraw its business – because this would reduce the funds available to support the scheme. And where the fact that the employer has a pension scheme is generally known, then it should be possible to demonstrate that the customer knew or ought to have known that this would be the effect. This may sound far-fetched, but it fits within the language of the bill.

An abundance of caution

Taken together, the risk is that these new offences will lead to everyone involved with a DB scheme becoming overly cautious about their actions - from trustees to bankers, purchasers and advisers.

Trustees becoming more nervous could damage the relationship between trustees and employers. More specifically, this abundance of caution potentially flies in the face of the additional flexibilities granted to distressed companies under the 2020 Corporate Insolvency and Governance Act (CIGA). CIGA can provide flexibility to help distressed employers but trustees – who are often a major creditor of an employer sponsoring a DB scheme - may be unwilling to agree to that flexibility because of concerns about criminal sanctions.

When I discussed this topic with Rob Orr of SAUL Trustee Company at last week's PLSA annual conference, he highlighted some additional issues for trustees. If trustees awarded any increases to scheme members, or adjusted actuarial factors, without first seeking additional funding from the employer, this could fall within the scope of the second offence.

Nervousness about the offences will also lead to more parties taking legal advice, with the associated additional costs, bureaucracy and delays. Although we may find that TPR is reluctant to exercise its new powers in practice, particularly in some of the scenarios we have outlined here, lawyers advising parties cannot ignore what the law says, or assume that a law will not be used. Anticipated guidance from TPR will be welcome, but will not trump the law.

The proposed new penalties proved very controversial when the Pension Schemes Bill was last debated in the House of Lords. The House of Commons Public Bills Committee is now seeking written evidence on this point, among others in the bill, ahead of its planned line-by-line scrutiny of the proposed legislation in early November. The PLSA has encouraged members who are concerned about the criminal penalties to respond.

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