Hot air, or real deterrent?

11 / 12 / 2019

Will the proposed new criminal offences and other measures stop another Sir Philip Green in his tracks?

  1. Introduction

The Pension Schemes Bill published in October 2019 includes a raft of new anti-avoidance provisions including proposed new criminal offences. The measures are aimed at ensuring defined benefit scheme members’ benefits are not undermined.

In this article we consider whether the new provisions will hit their mark, or simply gum up the works e.g. by obstructing proper business activity such as the ordinary buying and selling of companies and businesses. The Government is aware of the need for a balanced approach. As the Government’s March 2018 White Paper explains:

This isn’t about stopping legitimate business activity. The Government is clear that businesses must be allowed to make the right decisions to allow them to develop and grow. However, the Government is also clear that employers, where they can afford to, must also meet their pension responsibilities without undue delay or evasion.

  • Timetable

The timetable to date has been desperately slow:

March
2015
Sale of BHS by Sir Philip Green.
July 2016 House of Commons report recommends a stronger Pensions Regulator.
March 2018 Government publishes its White Paper “Protecting defined benefit schemes”.
June 2018 Government consults on the proposals in the White Paper for a stronger Regulator.
February
2019
Government response, including proposals to strengthen the Regulator’s powers.
October 2019 Government publishes the Pension Schemes Bill containing provisions strengthening the Regulator’s powers.
November 2019  Pension Schemes Bill  lost – General Election called.
January
2020 ?
The Pension Schemes Bill has cross party support and so may well  be re-introduced at the first opportunity.
October
2020 or
later ?
New provisions and supporting Regulations take effect.

So, some five years or more after the BHS sale involving Dominic Chappell, new legislation is on the horizon albeit the effective date is distant – may be October 2020, or later.

  • Proposals to strengthen the Regulator

In a nutshell, the Pension Schemes Bill envisaged the following:

  • New Contribution Notice (“CN“) grounds: The Regulator can issue a CN in various circumstances. These are to be extended to where an act (e.g. a corporate transaction) results in a material reduction in the amount of a section 75 debt had a section 75 debt become payable immediately after the relevant time, OR the act reduces the employer’s resources where the reduction is material relative to the amount of the scheme’s estimated section 75 debt;
    • New criminal offences:
      • failure to comply with a CN;
      • offence of deliberate and “without reasonable excuse” avoidance of employer debt;
      • offence of deliberate and “without reasonable excuse” conduct putting members’ accrued benefits at risk;
    • New financial penalty offences in circumstances where a criminal offence has been committed;
    • Expanded investigative powers for the Regulator including interview powers, inspection powers and rights to call for documents; and
    • New “notifiable events” (and penalties for non-compliance) in relation to certain events (to be prescribed in Regulations) and requirement to give details of certain proposed transactions to the Regulator and to scheme trustees in a “statement”.
  • Critique of the new provisions

The Law Commission in its 2010 enquiry into the use of the criminal law in the regulatory environment was very clear – any new criminal offences should be introduced only sparingly and have adequate safeguards.

The new proposed criminal offences are hedged round with protections and the new proposed grounds for CNs also provide for defences. The Government’s March 2018 White Paper describes the proposed criminal offence as “criminal offence to punish wilful or grossly reckless behaviour of directors (and any connected persons“).

Two points:

  • The Pension Schemes Bill refers to “intention” and “without reasonable cause”. This arguably casts a wider net than the White Paper, which refers to grossly reckless, envisaged; and
    • The targets for the new criminal offences are potentially varied, extending not only to the employer and connected and associated parties with the employer, but also to others involved with a transaction such as e.g. a lender, or private equity investors, or potentially even advisers. Bringing such persons within the orbit of a potential criminal offence is likely to be of great concern.
  • Conclusion

As the Bill, once re-introduced, passes through Parliament one hopes a sensible balance will be struck between the interests of all parties so that ordinary corporate transactions, suitable compromise agreements and appropriate debt apportionments can still occur.

Trustee boards, employers, lenders and investors should all familiarise themselves with the proposed new anti-avoidance provisions, some of which may be retrospective to some extent. Please let us know if you would like a briefing on the new provisions.

Returning to the question at the beginning, it seems likely the new provisions will deter would-be Sir Philip Greens entering into transactions which are highly detrimental to the interests of the pension scheme. Whether the new provisions will work well enough to prevent a slow car crash of a scheme over many years as with Carillion’s scheme remains to be seen.