Two new criminal offenses for misconduct in relation to defined benefit pension plans
The two new criminal offenses, which entered into force on October 1, 2021, target reprehensible behavior vis-à-vis defined benefit pension plans: (i) avoidance of the employer’s debt; and (ii) lead to the risk of the accumulated benefits of the scheme.
As previously reported, the new offenses caused a stir in the pension industry and beyond, given the breadth of potential criminal liability (which could relate to anyone involved in a defined benefit pension plan, even indirectly. ) and the limited nature of the defenses possibility. The penalties are significant, including an unlimited fine and / or up to seven years’ imprisonment, or a civil penalty of up to £ 1million.
It is feared that the new offenses will have a chilling effect on many day-to-day commercial and banking transactions, including in the restructuring sector.
The pension regulator’s policy on criminal offenses
The regulator released a draft policy for consultation in March 2021. Over six months and 49 consultation responses later, it released its final policy. While the substance of the final policy remains largely the same, the regulator has sought to address some of the concerns raised in the consultation process, notably by including a series of examples of potentially offensive conduct.
The Regulator has sought to reassure those affected by the scope of the new offenses that the “great majority” of people need not be affected. The regulator will focus its efforts on investigating and prosecuting “the most serious instances of intentional or reckless conduct” that already fell within its existing powers, rather than targeting “ordinary business activity“.
The final policy also specifies that new offenses do not have retroactive effect. Thus, behaviors that took place before October 1, 2021 will not be covered by the new offenses. However, the regulator may take facts prior to that date into account in the course of an investigation – for example, establishing a reasonable excuse for the conduct being investigated or the intent behind that conduct.
Meaning of “without reasonable excuse”
A key element of both offenses is that the accused acted or did not act “without reasonable excuse”.
The final policy confirms that determining whether a person had a reasonable excuse is ultimately a matter for the criminal courts. However, during his investigation, the Regulator will have to form his own opinion on this issue. The Regulator: (a) will examine the reasons why a person acted as they did, and the reasonableness of those reasons; (b) take into account the circumstances in which the act took place (for example, if there were time constraints); and (c) take into account the individual’s personal circumstances, including their duties, skills and experience as well as other relevant attributes.
The final policy explains that there are three factors that will be important in the regulator’s assessment of whether a person has a reasonable excuse:
- The extent to which the harm to the plan was an unintended consequence of the act or omission.
- The adequacy of any mitigation provided to offset the negative impact.
- Where no mitigation was provided or was inadequate, if there was a viable alternative that would have avoided or reduced the detrimental impact.
The regulator’s assessment of reasonable excuse will also take into account the extent of an individual’s communication and consultation with the pension plan trustees, as well as an individual’s compliance with their fiduciary or professional obligations. .
Remaining areas of concern
While the final policy is a significant improvement over the draft consultation, some areas of concern remain. For example:
- The policy has no statutory effect and is therefore non-binding.
- The wording of the policy remains vague and the case studies are too simplistic to reflect the nuances of a quick business transaction. This means that the regulator will have very wide discretion as to how it investigates and prosecutes new breaches.
- The Regulator cannot grant authorization for new infringements. If authorization is granted for an upcoming transaction under the notice of contribution or the financial support directing powers of the regulator, such authorization will not automatically constitute a reasonable excuse for the conduct in question.
- While there are examples in the policy that should reassure lenders, others seem to suggest that under certain circumstances, the exercise of contractual rights by lenders could trigger a breach. The regulator has provided examples where it considers that there would be a less damaging viable alternative (and therefore there is less chance of being a reasonable excuse). These include the case where a lender has the right to withdraw facilities immediately after a breach of bank covenants, but could instead choose to extend them for a month, which is very unlikely to risk the interests of the lender. , because the employer is entitled to large payments from debtors during this period.
- The final policy only defines the regulator’s approach to new breaches – but the Secretary for Work and Pensions and the Director of Public Prosecutions (and separate agencies in Scotland and Northern Ireland) can also prosecute infringements.
After that ?
The Regulator has published for consultation draft policies covering: (i) overlapping criminal / civil enforcement powers; (ii) an approach to impose a set of new financial sanctions (including the civil sanction mentioned above); and (iii) powers of information gathering. These policies, which are in consultation until December 22, 2021, should help give more flesh to the policy of criminal offenses.