The Pension Schemes Act 2021 (the Act) has introduced broad new criminal offences going far beyond the ‘reckless’ and ‘unscrupulous’ behaviour which the offences were originally envisaged to deter[1]. Whilst the Pensions Regulator (TPR) has today released a draft policy on how it will use its new criminal sanction powers (the TPR policy), some uncertainty remains and that coupled with the wide scope for potential criminal investigations created by the Act is now causing some concern amongst employers and trustees of defined benefit pension schemes.

Whilst the new criminal offences are not yet in force, TPR has confirmed that they are expected to come into force by Autumn this year.

Here, our pensions team and white collar crime specialists from our commercial litigation and dispute resolution practice look at the potential impact of the new criminal offences and provide some practical tips for corporates and scheme trustees for mitigating the potential pitfalls of a criminal investigation.

What are the new criminal offences?

The Act introduces three new criminal offences:

1. Failure to comply with a Contribution Notice issued by TPR;
2. Committing an act or failing to act with the intention of preventing the recovery of all or part of a statutory employer debt (a section 75 debt) or compromising or reducing a section 75 debt or preventing it becoming due (the avoidance of a section 75 debt offence);
3. Committing an act or failing to act in a way which detrimentally affects in a material way the likelihood of accrued scheme benefits being received (the conduct risking accrued scheme benefits offence).

There is a defence of “reasonable excuse” for these offences, which is explored in more detail below.

The latter two are the more controversial offences and each is punishable by up to seven years in prison and / or a fine.

Further detail on each of the offences can be found in our February Pensions Briefing.

What are the practical problems with the new offences?

There are a number of practical issues with the drafting of the new criminal offences and the “reasonable excuse” defence including a lack of clarity; the concern that legitimate activities may fall within the wide ambit of the legislation; and the potential to commit a “conduct risking accrued scheme benefits” offence without the need for actual dishonest intent on the part of the decision-maker.

Broad scope

The new criminal offences introduced by the Act come with a risk that decisions made in good faith to support the sponsoring corporate entity and its pension scheme, but which have an unintentional detrimental effect, may lead to a criminal prosecution. Although as the Act passed through Parliament the ministers stressed that it was not intended to change the norms or standards of corporate behaviour in the UK or (as the TPR policy confirms) “the kind of behaviour (TPR) investigate(s)” but rather “address the more serious intentional or reckless conduct that was already within the scope of (TPR’s) Contribution Notice powers”, the broad nature of the drafting creates considerable uncertainty and is therefore not helpful.

In particular, the “conduct risking accrued scheme benefits” offence is startlingly broad as it can be committed if a person’s action or failure to act ‘detrimentally affects in a material way the likelihood of accrued scheme benefits being received’. This definition is extremely wide and, while it will cover situations such as the unscrupulous fraud that it was intended to capture, it will also encompass ordinary business and investment decisions undertaken in good faith at the time.

Additionally, to commit the “conduct risking accrued scheme benefits” offence, the person must only have ‘known or ought to have known that their actions would have the detrimental effect,’ and it is therefore not necessary for there to be any subjective element of fault or dishonesty on the part of the individual. It would suffice that the individual should have known that the outcome could come about, rather than having subjectively foreseen such an outcome. In contrast, the “avoidance of a section 75 debt” offence requires an actual intention that one of the specific consequences listed in the Act should come about.

What about legitimate intentional steps taken to manage the scheme?

On the face of the Act, there are also intentional and legitimate steps which might be taken to prevent a section 75 debt from arising or to reduce the amount which has to be paid, which could arguably fall foul of the new offences.

Common examples of such arrangements, which are permitted under current pensions legislation in order to avoid legitimate corporate activity being stymied by the triggering of a large section 75 debt, include Scheme Apportionment Agreements and Flexible Apportionment Arrangements.

On the face of the Act, these would appear to be caught by the “avoidance of a section 75 debt” offence unless a reasonable excuse can be shown. Whilst we expect that statutorily permitted methods of managing section 75 debts would be viewed as a reasonable excuse by TPR or any jury, this is not expressly guaranteed by the Act. This may have the unsatisfactory effect of holding trustees and employers back from entering into legitimate arrangements due to fear of committing one of the new criminal offences and being subjected to a criminal investigation process.

Out of caution, trustees and corporates should therefore take care to clearly document their decision-making process before entering into any such arrangements in future.

The ‘reasonable excuse’ defence

A defence to liability under the new criminal offences is that the individual had a ‘reasonable excuse’ for engaging in the course of conduct which is in question.

According to the TPR policy, it will be up to the prosecution to prove that the defendant did not have a reasonable excuse. However, TPR made it clear that this does not mean that the prosecution will have to identify and disprove “every possible excuse” that the defendant may raise. Instead, the factors which will be treated as “significant” in determining whether there is a reasonable excuse are as follows:

• Whether the detrimental impact on the scheme was an incidental consequence of the act or omission (as opposed to a fundamentally necessary step to achieve the person’s purpose);
• The adequacy of any mitigation provided to offset the detrimental impact; and
• Where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact.

The TPR policy also states: “We expect those we investigate to explain their actions and put forward sufficient evidence of any matters that might amount to a reasonable excuse and will give them the opportunity to do so. We expect the basis for the reasonable excuse to be clear from contemporaneous records such as minutes of meetings, correspondence and written advice.”

Decision-makers (including both trustees and corporate directors) should therefore carefully scrutinise and keep a good record of the reasons for any decisions taken which may impact the pension scheme.

It is worth noting however that what constitutes a reasonable excuse, what considerations will count towards establishing it and who (the prosecution or the defence) will bear the burden of having to prove or disprove it is not clear from the Act itself. TPR policy is currently a draft only and subject to stakeholder consultation[2].

How might a criminal investigation impact the business and the pension scheme?

Given the broad scope of the Act and the now increased risk of committing a criminal offence, companies and individual trustees alike will be changing their approach to decision-making. Both are likely to be subject to a “chill factor” which may lead to over-cautious scheme management and investment. There is also a concern that individuals will not accept appointments (particularly in relation to distressed schemes) or will require greater protections should they choose to do so.

In particular, the Act provides TPR with enhanced interview and information-gathering powers. Section 110 of the Act amends section 72 of the Pensions Act 2004 to allow TPR to require the very wide range of trustees, professional advisers, employers or any other person appearing to TPR to be a person who holds, or is likely to hold, information relevant to the exercise of TPR’s functions, to attend compulsory interviews. The latter is an extremely broad category that reflects the wording of the powers held by the Serious Fraud Office (the SFO) in respect of investigations they are conducting in accordance with section 2 of the Criminal Justice Act 1987 (Section 2). It is also envisaged that being called to such an interview will override any duty of confidentiality owed by the advisers.

As with Section 2, failure to attend such interviews or to provide answers would be a criminal offence. These interviews must therefore be approached carefully and anyone who receives an interview notice should seek legal advice.

Section 111 of the Act also widens the scope of TPR’s powers to provide the Regulator with a power to inspect records at parties’ premises, including by means of unannounced raids.

A criminal investigation can have a major impact on those involved. Businesses and individuals alike face severe disruption as the investigation can span several years and the accompanying press coverage can cause serious reputational damage. The threat of a prison sentence heightens the severity of such an investigation, and highlights the crucial need for businesses and individuals to understand the potential offences and seek legal advice as early on in the process as possible, both when taking the decisions which could lead to an offence (with the aim of preventing any offence from being committed) and where there is any indication that TPR may investigate conduct.

What practical steps can you take?

There are several ways in which companies may mitigate some of the practical impacts of the new legislation and any potential criminal investigation. Companies should:

• Work to understand the TPR policy, obtaining advice where necessary and monitoring the release of the final policy;
• Provide training sessions to trustees and employees on the scope of the new offences and ensure that adequate policies and procedures are in place to avoid the risk that an offence is committed;
• Maintain a clear audit trail, ensure that the trustee risk register is updated when decisions are made and clear records are kept of decisions and their reasoning;
• Establish dawn raid / inspection policies and protocols to prepare for such events, setting out who should be contacted within the company initially and so that lawyers can be engaged quickly to advise on the dawn raid; and
• Seek legal advice as soon as possible upon the initiation of an investigation and when information gathering requests / interview requests are received.

The authors would like to thank Julia Chirnside, Senior Knowledge Lawyer, and Sophy Lelliott, Fran Garvey and Maria Zeber, trainees, for their contribution to this blog post.

[1] See the Protecting Defined Benefit Schemes 2018 White Paper released by the Department of Work and Pensions.

[2] The consultation closes on 22 April 2021, following which TPR will review all responses, make any necessary changes and publish the final policy later this year.