Pension Schemes Bill (Part 1) – Directors, banks and investors put on notice as new criminal sanctions and regulatory powers are significantly wider than expected

Following the announcement of a new Pension Schemes Bill in the Queen’s Speech on 14 October 2019, the Bill has now been published.

As anticipated, the Bill contains a number of significant new powers for the Pensions Regulator. However, the proposed new powers are significantly wider than many in the industry expected. If they are enacted in their current form, these powers could:

• severely impact corporate activity
• restrict the scope for businesses with defined benefit (DB) pension schemes to secure fresh investment, particularly where they are in financial difficulty or the scheme has a material deficit, and
• impact the feasibility, manner and desirability of restructuring a business or group which has a DB scheme.

In short, the new powers include new criminal and civil sanctions which could be applied to company directors, and potentially also investors, banks and other financial institutions, who take action which, broadly speaking, is materially detrimental to a DB pension scheme where they do not have a reasonable excuse for their actions.

The Bill is likely to fall if, as expected, Parliament is dissolved next week ahead of a general election on 12 December. However, the Bill should still be taken as a clear indication of the direction of travel that the new Government (of whatever persuasion) is likely to take.

Therefore, directors and others who are potentially in scope should have regard to the proposed new powers immediately in the context of corporate transactions, restructuring and re-financings and before paying dividends to shareholders.

Summary of new powers

The Pension Schemes Bill contains several notable provisions that, if implemented, would introduce:

• new criminal offences for company directors and other parties who take action to avoid or reduce an employer debt or action that jeopardises benefits under a DB scheme – these offences would be committed where any person, broadly:

1. takes action or engages in a course of conduct that prevents the recovery of the whole or part of a section 75 employer debt or reduces or compromises such a debt in any way, where the person intended the act to have that effect and there was no reasonable excuse
2. takes action or engages in a course of conduct that detrimentally affects in a material way the likelihood of benefits accrued under a DB scheme being received, where the person knew or ought to have known that the act would have such an effect and there was no reasonable excuse, or
3. fails to comply with a section 38 contribution notice.

The criminal sanctions for these offences include up to seven years imprisonment, a fine or both.

• a new civil penalty of up to £1 million that can be imposed on directors and other parties in a range of circumstances – this includes where a person:

1. is a party to an act or failure to act the purpose or one of the main purposes of which is to, broadly, avoid or reduce the amount of a section 75 employer debt that is, or which may become, due to a scheme and where it was not reasonable for the person to act or fail to act in the way that they did
2. is a party to an act or failure to act that, broadly, is materially detrimental to the prospect of benefits being paid under a DB scheme, where the person knew or ought to have known that the act or failure would have that effect and where it was not reasonable for the person to act or fail to act in the way that they did, or
3. knowingly or recklessly provides the Regulator or trustees with false or misleading information.

• two new triggers for issuing contribution notices – the new triggers will apply where the Regulator is of the opinion that:

1. an act or failure to act would have materially reduced the amount of the employer debt (calculated in accordance with section 75(4) of the Pensions Act 1995) likely to be recovered by a DB scheme on the hypothetical insolvency of one or more of the scheme’s sponsoring employers at the time of the relevant act or failure to act, where the value of the assets of the scheme was less than the amount of the liabilities of the scheme (as estimated by the Regulator, broadly speaking, on a buy-out basis) at that time, or
2. an act or failure to act materially reduces the value of the resources of a DB scheme’s sponsoring employer and the amount of the reduction was material relative to the amount of that employer's estimated section 75 debt in relation to the scheme.

The first trigger could apply where, for example, a company takes on additional debt which ranks above a DB scheme in the event of the company's insolvency or as a result of corporate restructuring.

The second trigger could apply, for example, on the sale of a valuable part of a business or following the payment of excessive dividends.

By way of reminder, a contribution notice may be issued on directors of a pension scheme sponsor and on connected and associated parties, including other group companies and directors of companies within the same group.

A statutory defence to these new triggers would be available in limited circumstances.

Impact of new powers

The scope of the Regulator’s proposed new powers are significantly broader than many within the industry had expected and the threshold which would need to be met in order for the new criminal sanctions to be applied is significantly lower than the Government has previously indicated.

In particular, the new criminal offences would apply:

• to “any person” who engages in an act or course of conduct covered by the new offences – this means that the new criminal sanctions could potentially be applied to:

1. directors of companies that support a DB scheme
2. directors of other group companies (including Top Cos) even where they are not “connected or associated” with a scheme sponsor
3. investors, and
4. persons within banks or other financial institutions who finance a company or group with a DB scheme.

Any person acting in their capacity as an insolvency practitioner is expressly excluded from the scope of these offences.

• where the person takes such action without a “reasonable excuse” – this threshold is significantly lower than that which applies in the context of similar criminal offences, such as fraudulent trading, which requires a director to have acted with intent to defraud a company’s creditors. It is also unclear what will amount to a “reasonable excuse”, particularly where decisions and actions are being examined with the benefit of 20:20 hindsight and, presumably, in circumstances where things have gone wrong. For example, would it be considered reasonable:

1. for a director to secure additional finance which ranks above a DB scheme in an attempt to rescue a business?
2. for a company to maintain what the Regulator may consider to be excessive dividend payments in order to attract investment?

In the first instance, it will be for the Regulator to determine what amounts to a “reasonable excuse”, although based on the current draft of the Bill, this will ultimately be a matter for the Courts to determine.

Even aside from these new criminal offences, the existence of the new civil fines of up to £1million which may be imposed on directors, investors, banks and any person who performs or knowingly assists with a relevant act (including advisers) and the expanded contribution notice powers will greatly increase the risks associated with transactions involving or the restructuring of a company or group with a DB scheme.

Other key provisions

The Bill also contains other important provisions which, if implemented, would:

• introduce important new funding requirements for DB schemes – these new requirements are likely to result in sponsors being forced to pay more money into their schemes more quickly
• significantly increase the Regulator’s information gathering powers, extend the notifiable events regime and introduce tougher sanctions for non-compliance
• introduce a statutory framework for the authorisation of collective defined contribution schemes, and
• introduce a regulatory framework for pension dashboards.

We will consider these aspects of the Bill in future posts.

The Bill does not contain any provisions on the authorisation and regulatory regime for DB consolidators.

When will these new powers come into force?

The Bill is likely to fall if, as expected, Parliament is dissolved next week ahead of a general election on 12 December. However, we understand that the Bill has broad cross party support. Therefore, the Bill should still be taken as a clear indication of the direction of travel that the new Government (of whatever persuasion) is likely to take.

In addition, although there is currently no indication that any of these new powers will be backdated, the Regulator can have regard to events that take place before new regulatory powers are introduced when deciding whether or not it is reasonable to exercise those powers, where the legislation does not prevent this. This was confirmed by the Court of Appeal in a recent judgment following ITV's appeal against the Financial Support Direction (FSD) issued against it in connection with the establishment of a joint venture vehicle for its TV rental business which took place before the FSD regime was even contemplated.

Corporate transactions and other corporate activities being considered now may also include future steps, such as refinancing or restructuring, which could be caught by these new powers even if the initial transaction or activity is completed before the new powers come into force.

Therefore, directors, investors, banks and others who are potentially within the scope of the new criminal sanctions and regulatory powers should have regard to them immediately in the context of all future corporate transactions, restructurings and re-financings and before paying dividends to shareholders where any such activity may prejudice a DB scheme.

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