The Pension Schemes Act 2021 – the biggest shake-up in UK pensions since Maxwell?

Following a long gestation period that can be traced back to the fallout from the BHS scandal, the Pension Schemes Act 2021 finally received Royal Assent on 11 February 2021. Running to over 130 sections and 11 schedules, the act will introduce some significant changes which could reach far beyond the pensions industry.

The act certainly covers a diverse range of topics, from new provisions on funding and investment strategy for defined benefit (DB) pension schemes, to restrictions on pension transfers to help combat scams, and new events which will need to be notified to the Pensions Regulator (TPR). Additionally, it will cover new circumstances in which TPR can impose contribution notices requiring employers (or connected persons) to make contributions to a DB scheme and new climate change governance and disclosure requirements.

A stronger pension regulator

To date, commentary on the act has largely focused on the introduction of extensions to TPR’s powers, particularly the new criminal and civil sanctions (including the headline grabbing penalties of up to £1m).

Concerns have been raised across the pensions industry regarding how TPR might exercise these new powers and how they might impact on ordinary business practices. In particular, some commentators have queried whether these new powers, combined with TPR’s mantra of being “clearer, quicker, tougher”, could have a detrimental impact on the UK’s corporate rescue culture.

The most notable of the new criminal offences being introduced by the act are the avoidance of employer debt (“the avoidance offence”) and conduct risking accrued DB benefits (“the conduct offence”).

A person will commit the avoidance offence if, without a reasonable excuse, they intentionally do an act or engage in a course of conduct (including a failure to act) that prevents a DB scheme from recovering all or any part of a statutory employer debt prevents that debt becoming due, compromises or otherwise settles that debt, or reduces the amount of the debt which would otherwise become due.  Broadly speaking, the statutory employer debt is assessed by reference to the cost of “buying out” or securing DB liabilities with an insurance company.

A person will commit the conduct offence if they engage in a course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits in a DB scheme being received, and knew or ought to have known that what they were doing would have that effect. Accrued scheme benefits are benefits which were accrued before the act, or before the last act in a series, and will be assessed by reference to section 67 of the Pensions Act 1995 (which protects a member’s accrued rights, known as ‘subsisting rights’).

Both of these new criminal offences are punishable by an unlimited fine and/or up to seven years in prison. Owing to the breadth of the drafting, they have the potential to capture ordinary business activity, as well as a wide spectrum of people (including directors of sponsoring employers, trustees and their advisers). Not surprisingly, therefore, they attracted a great deal of debate during the act’s passage through parliament.

As an alternative to the criminal sanctions outlined above, TPR will also have power to impose a civil penalty of up to £1m.

Such a penalty can also be imposed where a person knowingly or recklessly provides TPR, or pension scheme trustees in certain circumstances, “with information which is false or misleading in a material particular”. Knowingly or recklessly providing TPR with false or misleading information is already a criminal offence punishable by an unlimited fine or up to two years in prison.

Separately, TPR’s information gathering powers are also being extended by the act, including wider powers to inspect premises and to require trustees, scheme employers and professional advisers to attend an interview. Failure to attend an interview or to answer a question will also be a criminal offence, punishable by an unlimited fine.

What will this mean in practice?

Perhaps in recognition of the concerns voiced regarding its new powers, TPR quickly followed up the act with a consultation on its proposed policy approach towards investigating and prosecuting the two new criminal offences set out above.

In broad terms, the message which comes across from the proposed policy is that the new powers simply give TPR more options to sanction behaviour that would already be caught by its existing powers. The policy intention is to increase the potential consequences for those who go beyond what TPR already considers current commercial norms, with a key objective being to deter unscrupulous behaviour. TPR has also been keen to reiterate that it is (and will continue to be) a risk based and proportionate regulator.

Despite these assurances, concerns remain that TPR’s new powers could have a detrimental impact on the UK’s corporate rescue culture and the willingness of third parties to engage with distressed employers with DB pension liabilities. But, the message from TPR has been that this is not its intention. However, it remains the case that the new civil and criminal sanctions are broadly drafted and that they potentially capture anyone dealing/involved with an employer with a DB pension scheme.

We could see a reluctance from third parties to engage with employers in distressed scenarios when they most need to secure additional funding or to trade themselves out of trouble. By way of example, a request for security which ranks over a DB pension scheme is a common ask from lenders lending “new money” to a distressed employer.

Could this amount to conduct risking accrued DB benefits? Would there be potential grounds for TPR to issue a civil sanction if the granting of the security diminishes the assets available to a DB pension scheme? Theoretically, yes, though this will come down to the reasonableness of the lender’s conduct in the eyes of TPR. In practice, this is likely to depend on what the outcome would have been if no security were granted. TPR will also take into account any mitigation provided to offset the risk and impact on the DB scheme.

Impact on advisors

There is a slight warning bell for advisers in TPR’s draft policy, as it makes clear that anyone who helps or encourages someone to commit either of the new offences is liable to be tried and punished in the same way as the principal offender. Could this capture professional advisers? It is worth noting that nothing in the new legislation protects lawyers or other professionals (other than insolvency practitioners). However, TPR does emphasise that an adviser will not be liable if they have a reasonable excuse for advising in the way they did, even in circumstances where the principal may be found liable.

Recognising professional judgement may differ, it is reassuring that TPR makes it clear that, in most instances, “a professional person, acting in accordance with their professional duties, conduct, obligations and ethical standards applicable to the type of the advice being given, is likely to have a reasonable excuse”.

The UK’s corporate rescue culture

So, will the act give rise to significant changes to the UK’s corporate rescue culture? Probably not, but we might see additional complexity and the need for more legal advice in restructuring scenarios where there is a DB pension scheme. There may be more caution exercised by companies and professional advisers around the use of pre-packs in the future.

It will also be interesting to see how lenders react to the potential double whammy of TPR’s new powers and any significant uptick in the number of distressed employer scenarios following the removal of the remaining government support for businesses put in place during the pandemic.

It also remains to be seen whether TPR’s new powers will have an impact on the use of the relatively new option of a restructuring plan introduced by the Corporate Insolvency and Governance Act 2020 (which includes the controversial option to ‘cram down’ dissenting creditors), and whether an attempt will be made to use this restructuring option to compromise DB pension schemes liabilities in the future.

Nigel Cayless is senior counsel at Sackers sackers.com