- Prevention is better than cure. The criminal offences and new grounds for Contribution Notices (“CNs“) under the Pension Schemes Act 2021 (the “Act“) are nasty illnesses – but employers and trustee boards can take preventative action, as this article explains.
For a summary of the new offences and CN grounds, click here to see our briefing note issued on 11 February 2021 when the Act received Royal Assent. Essentially:
1.1. avoidance of employer debt and conduct risking accrued scheme benefits become criminal offences;
1.1. CNs can be issued if the new “employer insolvency test” and/or the new “employer resources test” are satisfied; and
1.1. employers must give advance notice to TPR and to scheme trustees of certain proposed events. - Why are the new provisions a problem?
2.1 The criminal offences:
2.1.1 they are criminal, even if one is acquitted there is reputational risk;
2.1.2 there is no advance Clearance procedure;
2.1.3 civil penalties can be imposed, without the need to satisfy the criminal burden of proof of beyond reasonable doubt;
2.1.4 the offence can be committed by any “person” – so the potential targets are not limited to the employer and connected parties but can extend to a whole range of third parties e.g. a lending bank and others; and
2.1.5 although the “intention” of the party is a key element for the new offence of avoiding or reducing section 75 debts, in the case of putting accrued scheme benefits at risk the person must either have known this would be the case or “ought to have known” – a much wider net.
Evidence of why a party acted as it did will be crucial. Although it is the prosecution which will have to show the person did not have a “reasonable excuse” for the doing the act, this will inevitably lead to the defendant wishing to demonstrate why it acted reasonably. So the evidence is all important.
TPR’s Policy on investigating and prosecuting – TPR’s consultation on its draft Policy closes on 22 April 2021. The finalised Policy is likely to come into force at the same time as the new criminal offences, expected on 1 October 2021.
TPR’s views on “reasonable excuse” and other matters are important but are not legally binding – only the court can definitely interpret the new legislation.
Do not delay obtaining legal advice on the scope of the new criminal offences in the draft Policy TRP warns that that, whilst prosecution cannot be based on acts before the expected date of 1 October 2021, TPR regards itself as entitled to collect evidence pre-dating this if, for example, “it indicates someone’s intention.”
2.2 The new CNs – scope:
The new CNs are more of a snapshot than the existing CNs and will potentially catch a much wider range of events. Paraphrasing:
2.2.1 employer insolvency test – where a scheme is in deficit on a section 75 basis, an act is caught if its effect is to “materially” reduce the amount of section 75 debt which the scheme trustees would be likely to recover from the employer immediately after the event compared to the amount recoverable from the employer before the event; and
2.2.2 employer resources test – where a scheme is in deficit on a section 75 basis, where the act reduces the value of the “resources” of an employer and the reduction is “material” relative to the estimated section 75 debt.
Many of the key terms in the Act such as “materially” and “resources” are to be defined in Regulations but the scope of the new tests is already clear – if the employer does an act which results in a material outflow of funds – a dividend, a sale etc., on the face of it, it may find itself within one of the new tests and will need to rely on one of the new CN defences.
2.2.3 Department of Work and Pensions’ Consultation on Regulations for the employer resources test – this consultation closes on 29 April 2021. The final Regulations are likely to apply at the same time as the CN employer resources test, expected October 2021.
DWP envisages “resources” of the employer being based on the company’s “normal” annual profit before tax (as per its adjusted filed annual accounts) before and after the act in question, to see whether the “resources” have reduced.
TPR accepts it must act reasonably. For instance, even if the snapshot calculation shows the test is satisfied, it may be inappropriate to apply the new CN ground if the company continues to have substantial strength for other reasons eg. assets not counted in the profit snapshot.
2.3 The new CNs – defences:
The employer will need to show it considered, before the act, whether the act would come within the new test; and, if it so concluded, that it took “all reasonable steps to eliminate or minimise” the adverse effect.
The defence is not wholly subjective: the employer must have made the enquiries which “a reasonably diligent person would have done” and, if the employer concluded there would be no material adverse effect, the employer must have taken into account the circumstances of which it was aware and those which the employer “ought reasonably to have been aware“.
- Prevention
Employers with defined benefit schemes, and those dealing with such employers, will need to keep the new criminal offences and CNs tests well in mind, so that if their actions are later called into questions the relevant detailed evidence and processes will already exist.
How best should employers and trustees prepare? Some outline suggestions:
3.1 Employer’s perspective
3.1.1 include the criminal offences and the new CNs in the risk register;
3.1.2 ensure discussion of DB scheme implications where decisions may materially impact on employer resources and/or the scheme;
3.1.3 Once the relevant regulations come into force, expected April 2022; give advance notice, containing the required information, to TPR and the scheme trustees of specified events such as sales of companies, asset sales and/or giving security to one or more others ahead of the scheme trustees as (prospective) unsecured creditors; and
3.1.4 review confidentiality agreements between employers and trustees.
3.2 Trustees’ perspective
3.2.1 adjust risk register;
3.2.2 review employer information sharing protocols;
3.2.3 review confidentiality agreements; and
3.2.4 review conflict of interest policy e.g. where trustee also company officer. - Conclusion
We look forward to assisting employers and trustees with their preparations for the new legislation. The new criminal offences and CN tests are expected to come into effect this Autumn, so now is the time to do the groundwork. There are to be ancillary Regulations and TPR Guidance over the next few months but employers and trustees should start familiarising themselves with the new legislation and obtain legal advice.
If you would like a training session, either as a one-off or at a trustee meeting, please let us know. In relation to the new criminal offences, on 11 March 2021 TPR published: (1)its draft policy on investigations and protection and (2) a Consultation on its approach – The Consultation closes on 22 April 2021.