Avoiding employer debt and putting scheme benefits at risk – The Pensions Regulator’s proposed approach to the investigation and prosecution of the new criminal offences.
Published: 11 March 2021
What this policy covers
This policy provides guidance on our approach to the investigation and prosecution under the new offences and the interaction of these new offences with our other powers. It includes some examples of the types of behaviour that may fall within the scope of these new offences.
Who is this policy for
This policy is for anyone seeking to understand our approach to investigating and prosecuting the new criminal offences of avoidance of employer debt to the scheme or risking accrued members’ benefits. It sets out how we interpret the new powers given to us, with examples of how we will put them into practice and should be read in conjunction with our Prosecution Policy which covers our general approach to criminal investigations and proceedings for all offences.
The offences appear in sections 58A and 58B of the Pensions Act 2004 and were introduced by the Pension Schemes Act 2021.
Terminology
For ease of reading, when we refer to “someone” in this guidance, it includes any legal person, which can be a company as well as an individual. When we refer to an “act”, it also includes the failure to act, or a series of acts.
Introduction
As the new legislation progressed through Parliament, ministers confirmed that the offences were not intended to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour in the UK. Rather, we understand they were aimed at enabling us to address the more serious intentional or reckless conduct that was already within the scope of our Contribution Notice (CN) powers, or would be in scope if the person was connected with the scheme employer.
Our approach will be guided by our understanding of this policy intention. While the introduction of the offences is not expected to change the kind of behaviour we investigate, there will be a fundamental change to the options available to us. We will use these powers where the seriousness of the behaviour warrants such intervention to further our statutory objectives and protect savers.
Both the CN and the criminal offences have a deterrent effect. Whether we decide to use the CN or the criminal offences or both will be guided by the efficient use of our resources to deter repetition of similar bad behaviour and act as a warning to others.
Our approach to the prosecution of the new offences will be closely linked to our existing CN power, in that we would expect to consider a case for prosecution in broadly the same circumstances where we would consider seeking a CN. However, there may be circumstances where we won’t pursue a CN (for example, where the target’s resources mean the amount of recovery would be low) but would still consider prosecution as its deterrent effect might be in the public interest. We may also decide to pursue a CN but not prosecute the target.
Although this policy sets out our interpretation of the new offences, the courts will ultimately decide the correct interpretation of the law. We will update it over time to reflect court decisions in relation to the offences and our experience.
Please note that, in England and Wales, prosecution of these new offences can be instituted by TPR or the Secretary of State, or by or with the consent of the Director of Public Prosecutions. In Scotland, public prosecutions are brought by the Crown Office and Procurator Fiscal Service, and in Northern Ireland by the Public Prosecution Service. Where any of the bodies listed above are considering or asked to consider taking action in respect of the offences, we would expect to be informed and consulted.
This policy has been created by TPR alone and may not reflect the interpretation of these other bodies, or their approach to investigation and prosecution of these offences.
The new offences
Under section 58A(2), someone commits the offence of avoidance of employer debt if they:
- do an act or engage in a course of conduct that:
(i) prevents the scheme from recovering all or any part of the debt that is due from the employer under section 75 of the Pensions Act 1995
(ii) prevents that debt becoming due
(iii) compromises or otherwise settles that debt, or
(iv) reduces the amount of that debt which would otherwise become due,
- they intended their actions to have this effect, and
- they didn’t have a reasonable excuse for doing the act or engaging in the course of conduct.
The debt under section 75 of the Pensions Act 1995 is a statutory debt owed by the employer to the trustees of the scheme, which becomes payable in circumstances defined by the legislation. These include when the employer suffers an insolvency event, or the scheme is wound up. Section 75 requires the scheme actuary to estimate the amount needed to secure the scheme's liabilities with annuities bought from a regulated insurance company.
Under section 58B(2), someone commits the offence if:
- they act or engage in a course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits being received (whether or not the benefits are to be received under the scheme),
(i) they knew or ought to have known that what they were doing would have that effect, and
(ii) they did not have a reasonable excuse
In this context, accrued scheme benefits are benefits which were accrued before the act, or before the last act in the series (section 58B(4) and (5)). Please refer to sections 67A(6) and (7) of the Pensions Act 1995 (section 58B(6)), for a definition of what amounts to accrued (or subsisting) rights. Benefits that members receive from the Pension Protection Fund (PPF) or under the Financial Assistance Scheme are to be disregarded when considering what scheme benefits are accrued (section 58B(7)).
Common elements
The offences under sections 58A and 58B of the Pensions Act 2004 have the following features in common:
- They can only be committed in respect of an occupational pension scheme that is not a money purchase scheme (sections 58A(1) and 58B(1))
- They are committed where:
- someone does or fails to do something within sections 58A(2)(a), 58B(2)(a), 58A(3), or 58B(3), or
- someone aids, abets, counsels or procures (referred to in this guidance as “helps or encourages”) another person to do this
They didn’t have a reasonable excuse for:
- acting as they did, or
- helping or encouraging someone else to do that act.
- The offences cannot be committed by someone appointed as and acting within their functions as an insolvency practitioner (section 58A(4) and (9) and section 58B(8)).
Our CN power, and points of commonality and difference with the new offences
Under section 38 of the 2004 Pensions Act, we can issue a CN to require a person to pay the scheme’s trustees, or the PPF, a specific amount. The new offences have some similar elements to the existing provisions in section 38.
Below, we set out the points of commonality and of difference between the new offences and the provisions of section 38.
We can issue a CN requiring a person to pay a sum to the trustees of a scheme, or the PPF, if:
- the person was at any time in the relevant period
(i) the scheme’s sponsoring employer or
(ii) connected with, or an associate of, the employer
and
- they were party to an act or a failure to act which satisfies one of the following:
(i) The main purpose of the act, failure or series, or one of its main purposes was:
a) to prevent the recovery of all or part of a debt due to the scheme under section 75 or
b) to prevent that debt from becoming due, to compromise or otherwise settle that debt, or to otherwise reduce the amount of debt which would otherwise become due
or
(ii) the act, failure or series detrimentally affected in a material way the likelihood of accrued scheme benefits being received by or in respect of scheme members
or
(iii) we are of the opinion that, if a debt to the scheme had fallen due under section 75, the amount of that debt that the scheme would have recovered would have materially reduced as a consequence of the act
or
(iv) we are of the opinion that the act reduced the value of the resources of the employer, and that the reduction was material when compared to the amount of the scheme’s estimated section 75 debt
and
- we are of the opinion that it is reasonable to impose liability on the person to pay the sum specified in the notice, having regard to
(i) the extent to which, in the circumstances of the case, it was reasonable for them to act in the way they did, and
(ii) other matters we consider relevant.
Two of the four bases for use of the power to issue a CN under section 38 are mirrored in the offences in sections 58A and 58B of the Pensions Act 2004, where:
- The act, failure or course of conduct:
- prevented the recovery (in whole or in part) of the employer’s debt to the scheme under section 75
- prevented that debt becoming due
- compromised or otherwise settled that debt or
- reduced the amount of that debt that would otherwise become due (section 58A(2)(a)).
or
- material detriment has been caused to the likelihood of members receiving their accrued scheme benefits (known as the ‘material detriment’ test)[1].
However, there are differences between them, on the one hand, the power to issue a CN, and on the other, the offences in sections 58A and 58B including:
- In the case of the offence under section 58B, it is for the prosecution to prove that the person knew or ought to have known that their actions would cause material detriment to the likelihood of members receiving their benefits. By contrast, in the case of a material detriment CN the burden is on the person to establish the statutory defence under section 38B. They would need to show that they gave due consideration to whether or not the intended act or failure to act would cause material detriment, and reasonably concluded that it would not – or that they took all reasonable steps to eliminate or minimise the anticipated material detriment before reaching that conclusion.
- The offences can be committed by anyone other than an insolvency practitioner appointed and acting within the scope of that appointment. Insolvency practitioners appointed and acting within the scope of those appointments are also excluded from the scope of a CN. By contrast, a CN can only be issued to someone who is the employer or was associated with or connected to the employer (as defined in the Insolvency Act 1986) in the period between the act or failure to act and TPR issuing a warning notice.
- Like the offence of avoidance of employer debt in section 58A, a CN may be issued where one or more of the main purposes of the act or failure was to prevent the recovery (of the whole or any part) of a debt which was due from the employer under section 75. Unlike the offence, a CN may also be issued where the main purpose of the act or failure was to prevent recovery (of the whole or any part) of a debt that might become due under section 75. The offence in section 58A does not apply where the act or failure prevented the recovery or any part of a debt that was not due at that time.
- There is a statutory limitation period applicable to our CN power. We may only issue a CN to someone we issued with a warning notice within six years of the date of their act or failure. There is no limitation period applicable to the criminal powers in sections 58A and 58B.
There are also instances where sections 58A and 58B are drafted in a different way to section 38, but we take the view that the intention was to achieve the same effect.
- The offences are committed by a person who “does an act or engages in a course of conduct”. Anyone who helps or encourages the commission of either of the offences (see section 8 of the Accessories and Abettors Act 1861) or agrees with another to commit the offences (see section 1 of the Criminal Law Act 1977) are also criminally liable. A CN can be issued to someone who “was party to an act or deliberate failure to act”, and the parties to an act include those who “knowingly assist in the act or failure”.
- The offence under section 58A is committed by someone who “intended” their act or course of conduct to have the effect of avoiding the employer’s section 75 debt. A CN can be issued to someone where “the main purpose or one of the main purposes” of their act or deliberate failure to act was avoiding the section 75 debt.
We interpret these provisions of section 58A/58B and section 38 in the same way.
Material detriment
In deciding whether the material detriment test is met for the purposes of the offence under section 58B, we will take the same approach as when considering issuing a material detriment CN under section 38.
In particular, we will take account of the matters set out in section 38A(4) of the Pensions Act 2004, Code of Practice 12 (Circumstances in relation to the material detriment test) and the Code-related guidance and, where relevant, have due regard to past determinations, both by the Determinations Panel and any court. We would not usually expect to prosecute anyone under section 58B who could establish a statutory defence to a material detriment CN under section 38B.
The offence under section 58B is committed where someone knew or ought to have known that their actions would cause material detriment. In considering what the person ought to have known, we will consider the circumstances as they were at the time of the act and not with the benefit of hindsight based on knowledge of what has happened since.
Secondary liability
As with many other criminal offences, a person who helps or encourages someone to commit either of the offences under section 58A or 58B is liable to be tried and punished in the same way as the principal offender.
As set out elsewhere in this guidance, these actions will not be considered offences if they are committed by a person who has a “reasonable excuse” for their actions. An adviser, whose advice assisted or encouraged an act that had the effect described in either offence, will not be liable if they have a reasonable excuse for advising in the way that they did, even in circumstances where the principal may be found liable.
We recognise that professional judgement may differ, however 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 applicable duties, obligations and standards will ordinarily depend on the professional discipline and oversight by the appropriate regulatory body.
For example, we may look to prosecute advisers in the following scenarios where the conduct they helped or encouraged on the part of the principal meets the ‘act’ test for the offence of conduct risking accrued scheme benefits:
- A legal adviser who helps an employer to lay a trail of false evidence designed to both hide the employer’s true intention for their actions and/or form the basis for a reasonable excuse defence.
- An investment manager who encourages a scheme to change their current appropriate investment strategy to one that significantly increases downside risk with little corresponding upside. This was done to earn a performance fee. This change results in a higher level of risk to the likelihood of members receiving accrued scheme benefits.
- An actuary engaged by the employer who provides accountancy advice on whether the funding test for a flexible apportionment arrangement is met in the full knowledge that they don’t have the requisite expertise to provide such advice and that their regulatory body does not regulate the giving of such advice. They also expect the scheme trustees to rely on it, when there is high probability that the replacement employer could not support the scheme in the way the test examines, thereby reducing the likelihood of members receiving full benefits.
- An accountant who knowingly assists in a material misstatement of the employer’s accounts in the knowledge these will be relied on to support a going concern status in an upcoming sales process which caused material detriment.
Statutory exception - reasonable excuse
The legal burden is on the prosecution to prove the absence of a reasonable excuse. However, this does not mean that the prosecution must identify and disprove every possible excuse open to someone. We expect those we 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. We expect the basis for the reasonable excuse to be clear from contemporaneous records such as minutes of meetings, correspondence and written advice.
What amounts to a reasonable excuse in any particular case will be fact-specific, but there are three factors which will be significant in determining whether there is a reasonable excuse for the act or omission:
- Whether the detrimental impact on the scheme/likelihood of full scheme benefits being received was an incidental consequence of the act or omission, as opposed to a fundamentally necessary step to achieve the person’s purpose.
The more incidental the detriment was to the person’s purpose the more that purpose would tend towards establishing a reasonable excuse.
Examples of scenarios in which the detrimental impact might be considered incidental would be where:
- The employer’s business is harmed by ordinary business activity conducted on arm’s-length terms by an unrelated party, such as a supplier or customer terminating a business relationship, or a lender refusing, revising or terminating a lending arrangement, where the purpose of the act was unrelated to the scheme[2].
- The employer’s business is affected by protests organised by a pressure group opposed to the employer’s activities.
- The employer’s business is disrupted by industrial action organised by a trade union representing the interests of employees.
An example of a scenario in which the detrimental impact might be considered a central, rather than an incidental, consequence of the act or omission, would be where a key supplier terminates a supply contract with the employer with the purpose of bringing about its insolvency so they can buy the whole of the employer’s business out of insolvency apart from the scheme.
- The adequacy of any mitigation provided to offset the detrimental impact.
Where the detrimental impact has been fully mitigated the person is more likely to have a reasonable excuse.
Examples of scenarios where the mitigation might be considered adequate would be where:
- 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.
When considering the adequacy of mitigation, we expect the scheme to be treated fairly in relation to other parties, taking account of the relative positions of the scheme and the person under investigation. This is similar to the way we assess mitigation in clearance cases.
- Where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact.
If there was a viable alternative with a less detrimental impact that would suggest an absence of reasonable excuse.
When considering whether a viable alternative existed, we will do so in the expectation that the scheme is treated fairly, particularly in circumstances where other parties have benefited from the act or failure. However, we won’t generally expect someone to pursue an alternative that means unreasonably disregarding their interests.
Examples of scenarios in which it might be considered that there was no viable alternative would be where:
- The employer raises debt with prior ranking security to that of the scheme or with a yield that is higher than conventional bank debt, where the new debt is critical for the survival of the business, there is no less onerous source of finance available, and continuation of the employer is a better outcome for the scheme than its insolvency.
- An employer faces a liquidity crisis and approaches its lending syndicate to increase the employer’s unsecured facilities. The members of the lending syndicate, who are under no obligation to do so, decline to lend further sums, which triggers an insolvency process.
In the case of the lending example above, where the syndicate is approached for more lending which it is not obliged to provide by the terms of the lending contract, the syndicate may be well aware that failing to lend more money could result in the insolvency of the employer. An alternative, that would avoid or reduce the detrimental impact, would be to lend. However, we would not expect them to do so if it was materially against their interests, eg if they assess there is a high risk of default on that further lending, or they consider they will recover more of their existing lending by default now than extending lending terms further, in each case where that assessment is reasonable.
Any given set of facts may engage more than one of these factors of significance.
There are additional factors which may have a bearing on whether to begin or continue a criminal investigation but are unlikely to be determinative alone. For example:
- The extent of communication and consultation with the trustees of the scheme before the act took place.
- Whether the person complied with any statutory duty to notify us of certain events affecting the scheme.
- Where we engaged in the matter, the extent of openness and timeliness of communication with TPR.
We will assess all relevant factors when considering whether a person establishes a reasonable excuse.
We are aware that proposing or acting in accordance with a scheme authorised by a court under Part 26A of the Corporate Insolvency and Governance Act 2020 could satisfy the “act” and “intention” elements of either or both of these offences, but we are likely to consider the fact of the court sanction a reasonable excuse. This should not be understood as impeding our ability to consider whether to issue a CN or Financial Support Directive (FSD) in these circumstances.
Clearance statements and engagement with TPR
Under section 42 of the Pensions Act 2004, a person can apply to us for a clearance statement in relation to our CN power. As outlined in our clearance guidance:
- We expect applications for clearance to only be made by people who could be subject to a CN or a FSD.
Our practice, when granting clearance, is to issue a statement to the effect that, in our opinion, in the circumstances described in the application it would not be reasonable to impose liability on the applicant under a CN.
Section 42 does not apply to the offences under sections 58A and 58B, and there is no equivalent provision applicable to those offences.
Selecting cases for investigation and prosecution
We will select cases for prosecution being mindful of the policy intent behind the new offences, for example where:
- the primary purpose of the conduct is the abandonment of the scheme without provision of appropriate mitigation
- significant financial gains have been unreasonably made to the detriment of the scheme
- there has been some other unfairness in the treatment of the scheme and/or
- the trustees, TPR and/or the PPF have been misled or not appropriately informed.
We will approach each stage of the process in a fair, balanced and impartial manner. We will generally engage early before we decide to prosecute for a specific behaviour.
The offence puts the burden on us to show that a person did not have a reasonable excuse. When engaging with potential suspects we will expect them to explain the reasons for acting in the way that they did, and that those reasons are well documented.
We will consider any explanation given to us for a person’s actions, and any information put forward to show, for example, that alternatives were explored or that there is no material detriment. We cannot foresee circumstances in which it would not be possible and appropriate for us to give a suspect the opportunity to put forward their side of the story before taking a prosecution decision. We expect those we investigate to explain their actions and put forward suitable and sufficient evidence for their actions.
Evidence pre-dating [commencement date - 1 October 2021] may be relevant to our investigation/prosecution of actions after that date, for example if it indicates someone’s intention.
Where there are grounds to suspect that a criminal offence may have been committed and the person’s answers may be used as evidence in a prosecution, any discussion will be conducted in the form of an interview under caution which complies with the requirements of the relevant Code of Practice issued under the Police and Criminal Evidence Act 1984.
In considering whether to prosecute someone, we will consider:
- their relationship, duties and proximity to the employer, the scheme, and the act or failure to act
- the extent of their involvement or influence, and
- any direct or indirect benefit(s) the person receives or is entitled to by reason of the act or failure to act.
The types of acts that we 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.
The type of behaviours the offence is trying to target are likely to be carried out by people with significant decision-making power, but this does not exclude the possibility of this behaviour being carried out, helped or encouraged by others who could also be prosecuted.
Other powers
Our approach to the investigation and prosecution of the criminal offences under sections 58A and 58B does not apply to any of our other powers.
Under section 58C and 58D of the Pensions Act 2004, we have the power to issue a financial penalty in respect of conduct which may amount to an offence under section 58A or 58B. However, if someone has been convicted of or is the subject of ongoing criminal proceedings regarding that act, we are prevented under section 88A(10) from fining them.
You can read more about our approach to financial penalties under section 88A in our Monetary Penalties Policy.
Footnotes
[1] There are additional grounds for issuing a CN, namely the employer insolvency test set out in section 38C of Pensions Act 2004 and the employer resources test set out in section 38E. There is no equivalent criminal liability in respect of these tests.
[2] This example assumes that the particular supplier/customer, or lender, is not associated or connected with the employer, which will be fact-dependent.