The Pension Schemes Bill will soon become law.  We have been told that regulation and Pensions Regulator (“TPR”) guidance will be published before TPR’s new powers become effective (likely late 2021). However, the mood music is clear and sponsors, trustees and advisers will need to consider the implications of these new powers now in order to avoid unintended consequences of their actions at a later date. 

In this blog, I consider whether the new powers will be aligned with the government’s previous rhetoric and question whether we as a pensions industry have fully woken up to just how wide reaching the implications of the new powers could be.  

Hatching a plan to catch ‘the bad guys’ 

DWP’s March 2018 White Paper outlined the Government’s intention to ‘target individuals who wilfully or recklessly mishandle pension schemes, endangering workers’ pensions.’

Very few would disagree with this intention in light of events at Carillion and BHS. There have also been other (less high profile) examples of where key stakeholders in a business have perhaps not given the pension scheme the attention it deserves. And so some action from the Government to address this issue was, in my view, needed. 

However, what the Act will contain does not match the original rhetoric – and the new criminal offences and civil penalties have a much wider scope than the activities of malicious company directors.  TPR has also been given powers to impose, far more easily, “Contribution Notices”, including for what might have previously been seen as normal business activity.  

What is the scope of the new criminal offences? 

The Act will introduce two new criminal offences which could potentially apply to a wide range of activity (both directly and indirectly related to a pension scheme). The offences do not just apply to company directors - and could extend to shareholders, lenders, trustees and their advisers - whether or not they were aware of the consequences of their actions at the time.  

The new ‘conduct risking accrued benefits’ offence is potentially very wide reaching and does not reference the high threshold of ‘recklessness’ or disregard which was all part of the earlier rhetoric. Instead there is reference to those being caught by the offence who had ‘no reasonable excuse’ and where the individual ‘knew or ought to have known’ that their conduct could have that effect on the scheme. 

The offence could have significant and far reaching implications to the UK pension system as we know it – beyond the realm of corporate restructuring and dividend policy. For example, a plain reading of the new law leads to questions such as: 

• Does a lender requesting additional security to support an increased lending facility for a struggling Company with a DB scheme come under the potential scope of the offence? 
• Is a director signing off a dividend at risk of the offence if a cash contribution is not made at the same time to the DB scheme on what TPR would consider to be an equal footing?
• And will members want to put themselves up for being a member nominated trustee when there is now the risk of a custodial jail sentence or a £1m personal fine if it were judged that they ‘ought to have known’ that the action (or inaction) they took as a member of the trustee board ultimately reduced the likelihood of members receiving their benefits? 

We are promised guidance from TPR on how they may implement their new powers – more on this below. 

Contribution notices – risking paralysis at a time when economic recovery is needed? 

TPR already has the power to impose “Contribution Notices” on companies and directors, to require them to make good any material detriment to the pension scheme by way of cash payment to the scheme. However, circumstances under which TPR can impose this power have proven to be very narrow to date. This had posed problems for TPR in trying to use these Contribution Notices to target some of the individuals involved in activities which clearly undermined the security of members’ benefits.  

Under the new Act, TPR will be able to impose Contribution Notices if either an ‘employer insolvency test’ or an ‘employer resources test’ is failed. These two new tests are intended to catch a much broader spectrum of behaviours and corporate activity than the current Contribution Notice regime. For example, it seems to me that any material restructuring or dividend decision will need to be tested in detail against the new requirements.  In some cases, what has previously been considered normal business activity will now breach the requirements, and the sponsor may need to agree mitigation with the trustees of the scheme.

If the sponsor fails to undertake these checks, they will be at risk of a Contribution Notice and the sponsor and trustees could potentially even fall into the criminal offence risk territory.

In my view, these are perhaps the most challenging area of the new powers from the point of view of corporate Britain recovering from the economic fallout from Covid19.

How will struggling sponsors of DB schemes raise more finance or restructure to ensure the continued viability of the business without falling foul of one of the new Contribution Notice tests?  They will need to involve the trustees sooner and attempt to demonstrate how they have balanced the needs of the business with the needs of the pension scheme – which may mean that corporate options will be more constrained than in the past.

There will be ‘reasonableness’ defences in relation to the threat of the new Contribution Notices, and arguments to be made in support of paying reasonable dividends or to support an ongoing viable business. But making use of this will require evidence of prior consideration and documentation.  What is therefore clear is that for a much wider range of normal corporate activity there will be a need for a clear audit trail of the process of ‘reasonable’ decision making – and clear supporting analysis to show how the pension scheme has been considered and, where relevant, provided with extra cash or guarantees. 

What about the guidance? 

The Pensions Minister, Guy Opperman, has referred to the issuance of guidance from TPR setting out how it intends to use its powers in order to reassure those expressing concern on the scope and impact of the new powers in practice. We anticipate that the guidance will follow in 2021 and we understand that the intent is that TPR’s new powers will not be ‘effective’ until the guidance is finalised.

However, guidance is only guidance – it will set out how TPR expects to act but won’t be binding and will be subject to change over time. It may also be difficult for TPR to be accommodating in the guidance given the criticism it received in the wake of Carillion and BHS, and now with the high-profile administration of Arcadia.

And there remains a risk that the new Contribution Notice powers may in effect be backdated in law.

There will be those that argue that the Regulator will be unlikely to bare its new set of teeth – and that this all amounts to political point scoring by the government in the aftermath of quite public admonishment of the Regulator over 2018/2019.

But the impact assessment prepared as part of the parliamentary process alongside the Act points to the expectation that up to 50 civil sanctions will be issued per year and up to 5 criminal convictions per year – with up to 2 of these leading to custodial sentences.

This all paints a very scary picture for any party (including advisers!) attempting to support a business with a DB scheme to reward shareholders and other stakeholders and to balance the books in a challenging post Covid19 environment. 

What does this mean for Trustees and Corporates? 

We see that Trustees will increasingly need to take a seat at the table as part of routine discussions on legitimate business activity. Trustees will need to be able to show that they have asked the right questions and pushed for that seat at the table. Corporates will need to be able to demonstrate how the pension scheme has been considered as part of the decision-making process. 

Where companies are considering prospective corporate actions that may not be implemented until later in 2021, they will need to seek early advice to ensure that the new rules are likely to be complied with, in case their actions are not completed by the time the law is switched on (and given the potential backdating risk in respect of the new Contribution Notices). 

There’s certainly a lot to think about as we await the Pension Schemes Bill becoming law and further guidance from TPR.