Our approach to the investigation and prosecution of the new criminal offences: consultation response

Consultation response on our approach to the investigation and prosecution of two of the criminal offences introduced by the Pension Schemes Act 2021.

Published: 29 September 2021

Background

The Pension Schemes Act 2021 introduced new criminal offences, including the offence of avoidance of employer debt, and the offence of conduct risking accrued scheme benefits, under new sections 58A and 58B respectively of the Pensions Act 2004.

In Spring 2021, we consulted on a draft policy on our approach to the investigation and prosecution of these offences. This report provides a summary of the key points that stakeholders raised during that consultation of our policy on our approach to the investigation and prosecution of these offences.

We also summarise how we have addressed the concerns raised by stakeholders.

Consultation responses

We received a total of 49 responses from a wide variety of stakeholders including advisers, trustees and industry associations, among others. The percentages shown in the bar chart below total 139%, this is due to some respondents having more than one role:

Key issues raised

Overall, respondents understood that, given the potentially broad scope of the offences as set out in the legislation, the approach proposed in the consultation draft of focusing on the most serious intentional or reckless behaviours that are covered by our Contribution Notice (CN) powers, or would be in scope if the targets were connected to the employer, was the right thing to do. However, a significant number highlighted that the draft policy fell short of properly addressing this intent. Broadly, the issues that stakeholders wanted more clarity on include:

• the need to be more specific about the general intent of the new criminal offences - for example by explaining their interaction with both the CN power and the new financial penalties of up to £1m.
• for the language of the policy to be consistent with the policy intent, and more detail on the circumstances in which we are unlikely to prosecute.
• the need for more examples of situations that could be caught by the offence of avoiding employer debt in 58A.
• more detail on the impact of clearance on the new offences.
• more clarity on and more examples of what might constitute a ‘reasonable excuse’.
• more examples relating to different issues, particularly:
  • statutory mechanisms (such as company voluntary arrangements, flexible apportionment arrangements, arrangements and reconstructions for companies in financial difficulty under Part 26A of the Companies Act 2006)
  • restructuring/insolvency
  • lending/refinancing
  • payment of dividends
  • role of advisors
  • covenant leakage.

In the following sections we explain whether and how we have responded to the issues identified by respondents, and we briefly discuss other concerns that were raised but that we did not feel could be properly addressed in the finalised policy.

Comments received and how we have responded to them

We asked:

Given that the offences have now been set in law, is our overall approach consistent with the policy intent?

You said:

1. Most respondents felt it was right that our approach to the use of the offences should be that they do not fundamentally change commercial norms or accepted standards of corporate behaviour in the UK (as at the date of their enactment). They also agreed that the offences should be used to focus on the more serious intentional or reckless conduct that was already within the scope of our CN power, or would be in scope if the person was connected with the scheme employer.
2. However, most respondents disagreed that the entirety of the draft policy reflected that approach:
   • Some sought further clarification on the interaction between our approach to the criminal offences and our approach to the new financial penalties for avoidance of employer debt and conduct risking accrued scheme benefits.
   • Others sought clarification on the interaction with the existing CN power, noting in particular that the policy was unclear whether CNs and the criminal offences would be used interchangeably.
   • Some respondents also asked whether the overall language in the policy could be strengthened to provide more clarity on the situations when we would not expect to prosecute.
   • A number of respondents highlighted that it would be useful to include some reference to prosecution principles similar to those set out by other regulators such as the Financial Conduct Authority, and to refer to the Code for Crown Prosecutors.
3. Further to the above points regarding the draft policy itself, many respondents called for a coordinated approach to these new offences from all relevant prosecuting authorities, in light of the fact that we are not the only listed prosecuting authority.

Our response:

We understand the policy intent in relation to these offences was to focus on the examples of intentional or reckless conduct that were already within the scope of our CN power, or would be in scope if the person was connected with the scheme employer. We have highlighted this in the introduction of the finalised policy, as well as the fact that we do not intend to prosecute behaviour which we consider to be ordinary commercial activity.

We agree that it would be helpful for the criminal powers to be given context relative to our CN and financial penalty powers, and our broader approach to enforcement. To address this, we are publishing a draft of our policy on our approach to overlapping powers, as well as a draft update to our monetary penalties policy on high fines, and a draft policy on our approach to gathering information. We are consulting on these documents during Autumn 2021, with a view to having the policies finalised early in 2022.

We believe that the clarity sought by respondents who suggested incorporating content from the Code for Crown Prosecutors and adopting/adapting the enforcement principles set out by other bodies is better suited to our broader prosecution policy and compliance and enforcement policies, which will be updated in due course. Our finalised policy in relation to the offences in sections 58A and 58B is narrowly focused on the new offences, and does not duplicate content applicable more broadly.

In addition to these forthcoming updates we have sharpened the language in the finalised version of this policy to clarify that the measures will only be used to target the most serious intentional and reckless instances of such behaviour. We believe this will improve understanding of our approach to these offences and add further context to them relative to our other powers.

The policy now includes Appendix 2, which sets out a number of common situations in which we would generally expect a person to have a reasonable excuse. These include:

• where a person establishes a statutory defence to a material detriment CN under section 38B of the Pensions Act 2004
• where a person enters into a debt or liability management arrangement under the Occupational Pension Schemes (Employer Debt) Regulations 2005
• some restructuring mechanics, and
• advisers acting in accordance with their professional duties, conduct obligations and ethical standards applicable to the type of advice being given.

You can find more information and explanation of the above areas in Appendix 2 of the finalised policy.

We are working with other the prosecuting authorities with the aim of agreeing memoranda of understanding for cooperation in relation to our respective roles in the investigation and prosecution of these new offences. This should address stakeholder feedback on the need for some coordinated approach from the different prosecuting authorities.

We asked:

Is the policy clear on our overall approach to the new offences? If not, how could we make it clearer, without constricting the powers?

You said:

In general, respondents agreed that the principles-based approach is useful, however they also highlighted that the clarity of the draft policy could be further enhanced in a variety of ways:

1. Many respondents thought that there was not enough content related to s58A offences and asked for greater explanation about our approach to the offence of avoidance of employer debt.
2. Another theme was clarity around behaviours that could fall outside the remit of the offences and the factors relevant to whether a person has a reasonable excuse. Concerns in this area included how the offences would interact with the existing insolvency legislation and statutory mechanisms available to employers and schemes, and also the extent that full mitigation for a specific act would provide a reasonable excuse. In addition, many respondents raised the role of clearance statements in relation to the new criminal offences and the provision of comfort to potential targets. They asked for the policy to be clearer about the steps a would-be target could take to conclude they have a reasonable excuse.
3. Respondents raised a number of points requiring more clarity, for example, some thought the draft policy could imply that a person could be prosecuted for failing to scrutinise a different party’s actions (eg that a lender would need to check on the work the employer directors had done in seeking alternative sources of finance).
4. Some respondents had concerns around the length of time they may need to retain documents, as the legislation does not provide for a lookback period for these offences, contrasting with the six-year period for our CN power.
5. Respondents also asked for more clarity around how we go about conducting our investigations in general, with some particular concerns around whether information disclosed during criminal investigations would be made public.

Our response:

In light of points 1 and 2 above, Appendix 2 of the finalised policy sets out a number of common situations in which we would generally expect a person to have a reasonable excuse. We believe this provides comfort to potential targets. We have also sought to strengthen and improve the drafting throughout to make clear when we are referring to both offences.

The finalised policy also includes a new case study that addresses many of the concerns expressed in the call for more specific examples. This concerns a restructuring scenario that looks at the events from the perspective of:

• the employer
• the parent company of the employer
• lenders
• an arm’s length customer

We believe this case study will help to allay many of the concerns expressed by stakeholders before and during the consultation on whether the new offences will affect key restructuring activities.

With regards to clearance statements, clearance does not apply to the criminal offences, and we’ve updated our Clearance Guidance to reflect this.

Alongside clarifying language throughout the policy, we have now included a specific section in the finalised policy explaining who is in the scope of these offences. Previously, this information was covered in both an explanation of the offences and a later section covering secondary liability. We believe the new structure significantly improves clarity in this area.

We understand stakeholders’ concerns around the length of time documents may need to be retained if they are needed to explain or inform why an act was or wasn’t undertaken, but it is not appropriate for us to indicate a time limit for prosecution when the legislation does not. This is the same position as with most criminal offences, including those that already apply in the context of corporate operations.

In response to requests for more details on how we investigate, the draft policy on our approach to information gathering explains our approach to interviews and inspections during an investigation.

We asked:

Is the policy clear on how cases will be selected for investigation? If not, how could we make it clearer?

You said:

Respondents said the information in the draft policy on how we will select cases for investigation was limited, and made a number of useful suggestions to improve this section:

1. Provide more clarity on the situations in which we would pursue a criminal prosecution or one of the new financial penalties of up to £1m, and more details of behaviours that would and wouldn’t engage the criminal offences.
2. Related to the point above, some respondents sought further clarification on whether there were differences in cases where we would investigate, and those we would investigate and go on to prosecute.
3. Many respondents wanted more information about our position on whether the offences have a retrospective effect, particularly whether our policy was in conflict with the both the legislation and government intent.   
4. Finally, similar points were made in answer to this question as to the previous question, around the possibility of TPR providing an “indicative” lookback period for the offence, and for how long would-be targets would be expected to keep documents.

Our response:

In response to point 1, our draft update to the monetary penalties policy on high fines explains our approach to the new financial penalties of up to £1m for avoidance-type behaviour. The draft overlapping powers policy explains how we will proceed when facing situations that could attract our criminal or other regulatory powers.

We believe a principles-based approach is appropriate when looking at behaviours of the type the new offences deal with. Our emphasis is on behaviour that is the most serious, intentional and reckless and we have clarified the language used throughout the policy to ensure this is as unambiguous as possible.

With regards to whether there were differences between cases where we would only investigate, and those we would go on to prosecute, we have improved the section on investigation. Furthermore, the draft overlapping powers policy provides more detail on our approach when investigating situations in which both our criminal and regulatory powers could be in scope.

Regarding the comments about the use of evidence pre-dating commencement of the offences (point 3), the Government has made it clear that the offences are for behaviours that take place after the legislation takes effect. We remain of the view that it could be appropriate for us to examine evidence pre-dating the commencement of any act for the purpose of assessing whether a person has a reasonable excuse, or to understand whether the ‘mental element’ of the offence is made out. Equally, it would be appropriate for persons investigated to refer to decisions taken before the offences began to show that they had a reasonable excuse.

We asked:

Are the examples useful in illustrating the factors that we will take into account when considering whether a potential defendant has a reasonable excuse to act or fail to act? Are there any other examples you would consider helpful?

You said

1. Most respondents felt that the draft policy didn’t refer to the circumstances in which the new powers would be used against trustees, so examples of such scenarios would be helpful. Some also wanted our assurance that trustees acting in accordance with their fiduciary duties would not be prosecuted.
2. There were recurrent requests for examples of what actions targets involved in a restructuring should take/not take in order not to be caught by the new criminal offences.
3. Numerous respondents felt it would be helpful to know what falls within the scope of reasonable excuse and stated that, while the examples contained within the policy relate to clear-cut cases, more nuanced cases were not addressed.
4. While the draft policy states that "where the detrimental impact has been fully mitigated, the person is more likely to have a reasonable excuse", most respondents felt that this statement left room for ambiguity and want to see examples of where providing full mitigation would not reasonably excuse a detrimental impact.
5. We were asked to consider including examples that addressed avoidance of employer debt, statutory debt mechanisms, refinancing and lending, insolvency, the payment of dividends, covenant leakage, guarantors and advisers who provide a wide range of options.

Our response:

We understand that many stakeholders, including trustees, are concerned about the potentially very broad scope of the offences. However, the vast majority do not need to be concerned, and the aim of the examples is to seek to provide some illustrations of how we will apply the principles-based approach. We have introduced a more detailed case study that considers a restructuring scenario from the point of view of an employer, a parent company, lenders and an arm’s-length customer. The case study also seeks to draw together the content around reasonable excuse and apply it to a set of facts in relation to these participants.

We acknowledge the confusion caused by the draft policy’s content around full mitigation of a detrimental impact. We have now expanded the section dealing with mitigation, including an explanation of how we assess the timing of the mitigation, and provided examples of scenarios where mitigation could be considered adequate.

On statutory debt mechanisms Appendix 2 sets out that, subject to some conditions, we would generally expect a person to have a reasonable excuse where they enter into an easement under the Occupational Pension Schemes (Employer Debt) Regulations 2005 or where a person proposes or acts in accordance with a scheme authorised by a court order under Part 26A of the Corporate Insolvency and Governance Act 2020.

We have sought to improve the policy to be clearer regarding our approach to advisers, through clearer drafting, and the inclusion of examples of common activities and behaviours that advisers engage in as part of Appendix 2.

Appendix: List of respondents to the consultation

We received 49 responses in total. 43 of the respondents gave their express consent to be listed, with six either requesting confidentiality or not specifying consent at all.

• 100 Group Pensions Committee
• Association of Consulting Actuaries
• Allen & Overy
• Aon
• Association of Pension Lawyers
• Association of Professional Pension Trustees
• ARC Benefits
• Ashurst
• Atkin UK
• BAE Systems
• Barnett Waddingham
• Buck
• British Private Equity and Venture Capital Association
• Confederation of British Industry
• Insolvency Law Committee of the City of London Law Society
• City of London Law Society Company Law Committee
• Deloitte
• Employer Covenant Practitioners Association
• Eversheds Sutherland
• EY
• Freshfields
• Gowling WLG
• Hebert Smith Freehills
• Hymans Robertson
• Institute of Chartered Accountants of Scotland
• Insolvency Lawyers’ Association
• Isio
• Law Society of Scotland
• Lane Clark & Peacock
• Lincoln
• Mercer
• Middlesex Aerospace
• Osborne Clarke
• Penfida
• Pensions and Lifetime Savings Association
• RPMI
• Superannuation Arrangements of the University of London
• Society of Pension Professionals
• Squire Patton Boggs
• Travers Smith
• UK Finance
• Universities Superannuation Scheme
• XPS Pensions Group

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