The Pension Schemes Act 2021 received Royal Assent on 11 February 2021 and, piece by piece, is delivering significant changes to the pensions landscape. Many of those pieces have caused quite a stir among trustees, employers and pension professionals – in particular, TPR’s new criminal and civil powers, which came into force on 1 October 2021. The new regime will require companies to consider carefully the effect of any corporate activity in which a defined benefit pension scheme is involved – whether that be disposals to or acquisitions from third parties, or internal corporate restructurings.  Trustees will also need to take into account the provisions of the Act in any related decision-making process. We will look at each of the key changes and the issues raised, and a table summarising the progress of implementation is included at the end of this note.

TPR’s new Moral Hazard powers - criminal sanctions

The Act introduces two significant new criminal offences: the offence of avoidance of employer debt, and the offence of conduct risking accrued scheme benefits.

  1. The employer debt offence can apply to anyone who:
  • prevents the recovery of the whole or any part of a debt due to the scheme under section 75 of the Pensions Act 1995;
  • prevents such a debt becoming due;
  • compromises or otherwise settles such a debt; or
  • reduces the amount of such debt which would otherwise become due.
  1. The offence of conduct risking accrued scheme benefits is another new offence, defined as an “…act or course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits being received” without reasonable excuse and where the person committing the act knew or ought to have known that that the act or course of conduct would have that effect.

These two offences mirror the existing triggers for a contribution notice. Both new offences can result in an unlimited fine and/or up to seven years in jail. Alternatively, TPR can deal with similar transgressions by means of financial penalties of up to £1m.

There is also a further offence, relating to the failure to pay a Contribution Notice by its due date – that will constitute either a criminal offence leading to a fine or attract a new scale of civil financial penalties of up to £1m.

The first two offences replace the “wilful or reckless behaviour in relation to a pension scheme” offence. These new offences are much wider in scope, although the Government has said that it is not its intention to interfere with “routine business activities”.  On a strict reading of the second offence, arguably trustees and their advisers could be drawn within its ambit.  Such concerns led to TPR consulting on a new Criminal Offences Policy, the final version of which was published on 29 September 2021. We will look at that shortly.

Contribution notices – two new triggers

The Act also adds wider scope to TPR’s ability to issue contribution notices. A quick reminder: TPR has the power to issue a CN to an employer, or a person associated or connected to the employer, in relation to certain acts or deliberate failures to act. The notice can require the person to whom it is issued to pay a specified sum of money to the pension scheme. Now, it will be possible for TPR to do so if either an “employer insolvency test” or an “employer resources test” is failed.

  • The first new test is where an act or failure to act “would have materially reduced the amount of the [section 75] debt likely to be recovered by the scheme”.
  • The second new test is where an act or failure to act “reduced the value of the resources of the employer” and “that reduction was a material reduction relative to the amount of the estimated section 75 debt in relation to the scheme”.

There is, however, a new accompanying statutory defence – the target of the notice can demonstrate that they gave due consideration in advance to the impact of the act or failure to act and either concluded that there was no material reduction in the recoverable debt/employer resources, or else provided appropriate mitigation against any reduction. The existing statutory clearance mechanism will also continue to be available (although it is worth adding that clearance is only available in relation to parties who may be subject to a CN, and there is no equivalent clearance regime for the employer debt offence or the offence of conduct risking accrued scheme benefits).

Another notable aspect is that the ‘trigger date’ which TPR would use as the basis for estimating a section 75 debt when issuing a contribution notice. Rather than being the date on which the actual trigger event took place, the date would be tied to the end of the last scheme year prior to the day on which TPR notifies a party of an intended contribution notice. That will mean that the amount demanded by TPR can be much closer to the scheme’s section 75 debt at the time TPR issues its determination, rather than when the trigger event occurred. That could have a dramatic effect on the amount set out in a contribution notice.

Returning to TPR’s policy on the two new offences, some key messages from that are:

  • TPR states that “the vast majority of people do not need to be concerned - we don’t intend to prosecute behaviour which we consider to be ordinary commercial activity”, and that it will “investigate and prosecute the most serious examples of intentional or reckless conduct that was were already within the scope of our Contribution Notice (CN) powers”.
  • The legal burden is on the prosecution to prove the absence of a reasonable excuse. But TPR expects those they 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. They expect the basis for the reasonable excuse to be clear from contemporaneous records such as minutes of meetings, correspondence and written advice.  TPR goes into some detail as to what amounts to a reasonable excuse: importantly, TPR states that “…the more the detrimental impact has been mitigated, the more likely the person is to have a reasonable excuse”, and gives the following examples of scenarios where the mitigation might be considered adequate:
  • An employer that is legally supported by the covenant of a wider group of companies is sold to a buyer, terminating the wider support arrangements. A combination of part of the sale proceeds being paid to the scheme and the provision of guarantees from entities in the new employer group fully compensate for the loss of the seller group support.
  • The employer grants security for the benefit of entities outside the direct covenant, but the security provided is subordinated to all present and future liabilities of the scheme.
  • The employer makes cash transfers to a treasury company within its wider group, but the employer is given an enforceable right to demand repayment at any time, and the scheme’s funding position is strong and stable.

Additionally, TPR notes that the types of acts that they have previously encountered that might be considered appropriate for prosecution are:

  • The sale of an employer without replacing an existing parental guarantee over the employer's section 75 debt, resulting in the loss of the guarantee (in circumstances where the trustees were not told about the sale in advance).
  • The purchase of an employer with no further investment into its business, subsequent mismanagement of the company, and extraction of value before the company went into administration.
  • The stripping of assets from an employer, which resulted in substantial weakening of the support for the scheme.
  • Taking steps to bring about the unnecessary insolvency of the scheme employer with the intention of buying the employer’s business without the scheme.
  • Evidence pre-dating the commencement date of their powers may be relevant to their investigation/prosecution of actions after that date, for example if it indicates someone’s intention.

MacRoberts comment: Given the range of circumstances could be ‘caught’ by the new offences (and the wide range of parties who could fall under their ambit), we strongly recommend that trustees and employers take advice on any kind of proposed corporate activity which may involve a DB scheme as soon as possible.

In terms of the offence of ‘conduct risking accrued scheme benefits’, it appears to be of assistance that TPR has confirmed that, “In considering what the person ought to have known, we will look at the circumstances as they were at the time of the act and not with the benefit of hindsight”. It would seem theoretically difficult for TPR not take hindsight into account when assessing past circumstances.

Trustees may take some comfort from TPR’s specific comment that one of the factors which it may take into account in determining whether a person had a ‘reasonable excuse’ is whether that person was acting in compliance with their fiduciary duties to the scheme. They may also feel encouraged that entering into an employer debt easement (such as a flexible apportionment arrangement) in good faith will generally also give them a ‘reasonable excuse’.Additionally, in terms of the prosecution process for criminal offences, a distinction to note between the Scottish and English systems is that, while TPR can bring a prosecution in England and Wales, only the Crown Office and Procurator Fiscal Service has power to prosecute in Scotland.

Notifiable events

Employers will have to give notice to the TPR of certain events through its expanded notifiable events regime. As well as notice of the events, they will also have to notify TPR of material changes to the effect of such events and the non-occurrence of these events. These notices must be given “as soon as reasonably practicable” and a regulation-making power is introduced to enable notification to be required from a prescribed earlier date.

An accompanying ‘statement of intent’ will need to be given to TPR and the trustees which will include any adverse effects of the event on the scheme, any steps to be taken in mitigation of those effects. The events themselves are set out draft regulations which were included in a consultation launched on 8 September. As expected, the events covered by the ‘statement of intent’ requirements are:

  • the sale of a controlling interest in a scheme employer (this is an existing notifiable event);
  • the sale of a ‘material proportion’ of the business or assets of a sponsoring employer, with ‘material proportion’ being defined as:
    • in the case of an employer’s business, a proportion which accounts for more than 25% of its annual revenue, either on its own or together with other disposals decided upon or completed in the 12 months prior to the date of the notifiable event; and
    • in the case of an employer’s assets, a proportion which accounts for more than 25% of the gross value of its assets (again, either on its own or together with any other sales of its assets decided upon or completed within the 12 months prior to the date of the notifiable event); and
  • the granting of a ‘relevant security’ in priority to the scheme on a debt to give it priority over debt to the scheme – a ‘relevant security’ being one that is granted or extended by the employer or one or more of its subsidiaries “comprising more than 25% of either the employer’s consolidated revenue or its gross assets”

A failure to comply with the requirement to prepare an accompanying statement without ‘reasonable excuse’ could attract a new civil penalty up to a maximum of £1 million. TPR has indicated that it expects the updated notifiable events regime to come into play in 2022.

The new, tougher funding regime

The Act requires trustees and employers to agree a long-term funding and investment strategy for a scheme. That will need to be set out in a Chair’s statement and submitted to TPR. The statement must explain the risks surrounding the strategy; how those risks will be mitigated; the trustees’ assessment of how they implemented the strategy, and any lessons learned from doing so. Schemes will have to calculate technical provisions in a manner which is consistent with the agreed strategy, and TPR will be able to intervene and potentially direct that the strategy be revised. Additionally, trustees will have to send a copy of the actuarial valuation as soon as reasonably practicable after receiving it, along with other information to be prescribed.

Consultation on regulations, and the second consultation on TPR’s revised funding code of practice, will follow. We expect that the legislation in this area will tie in with TPR’s ongoing DB funding consultation on the new ‘fast track’ and ‘bespoke’ valuation approaches, and is unlikely to be in final form until the end of 2021 at the earliest. TPR has stated that it does not expect the new funding code to come into force until late 2022 at the earliest.

Further changes

Finally, the Act makes some other changes – to briefly mention them:

  • Climate change governance and disclosure: By the end of 2022, trustees of all occupational pension schemes with £5 billion or more in assets, and authorised master trusts, must implement climate change governance measures and produce and publish a TCFD report containing associated disclosures including scenario analysis, metrics and targets. Schemes with £1 billion or more in assets must do likewise by the end of the following year.
  • Transfer conditions: In a bid to reduce instances of pension scams, trustees will be given greater control over members’ statutory rights to insist on a transfer of benefits: they will allow transferring scheme trustees to refuse member requests to transfer in certain “red flag” situations, once the trustees have undertaken appropriate due diligence. Additionally, new criteria will be introduced around safe destinations for transfers, the obtaining of guidance by members, and the information to be required before a transfer can be made (for example, evidence of employment such as payslips). 
  • TPR’s information-gathering powers have been further strengthened.
  • Provision is made for the much-discussed pensions dashboard, and for data to be required to be provided by schemes in aid of that.
  • The Act creates the framework for Collective Money Purchase Schemes – these are similar to DC schemes, however, the member would own a proportionate share of the collective scheme assets, rather than an individual share. It allows for the pooling of investment and longevity risks among the membership pool, rather than with an individual member or the employer.

We will be keeping a close eye on developments as the various regulations bed in, and will report in more detail on some of the climate change-related changes mentioned above. Companies should, in particular, take advice as early as possible ahead of any proposed corporate activity to ensure that there are no adverse implications as a consequence of the new Act. Likewise, trustees need to be vigilant of the potential impact of such activity. If you would like to discuss any aspect of the new requirements, please do not hesitate to get in touch.

MacRoberts LLP

4 October 2021

PENSION SCHEMES ACT 2021: IMPLEMENTATION TIMETABLE

Subject Consultation/policy developments When will changes be in force?
TPR’s new criminal and civil powers On 29 September 2021, TPR published its response to its consultation on its approach to the investigation and prosecution of the new criminal offences, along with its Criminal Offences Policy.
At the same time, TPR launched a further consultation on its approach to using its new powers, which includes 3 new draft policies: an Overlapping Powers Policy, a Monetary Penalty Policy regarding high fines, and an Information Gathering Policy.  The consultation closes on 22 December.		 The new powers under the Act came into force on 1 October 2021, as did two new sets of regulations: The Pensions Regulator (Employer Resources Test) Regulations 2021; and The Pensions Regulator (Information Gathering Powers and Modification) Regulations 2021.
Climate change risk reporting for pension schemes Draft guidance published by each of the DWP and TPR. The provisions of the Act came into force on 1 October 2021, as did The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021.
Transfer values Consultation on draft Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 closed on 10 June 2021. Regulations in draft form: implementation expected in Autumn 2021.
New notifiable events and TPR investigations Consultation on notifiable events regulations launched on 8 September 2021. Expected in 2022.  Finalised regime to commence following consultation "as soon as practical thereafter".
Pensions dashboards Consultation on draft regulations expected in December 2021. Regime likely to be in place in the course of 2023.
Defined benefit scheme funding Consultation on new code expected later in 2021. Finalised new code not expected until 2022 "at the earliest".