United Kingdom: Regulator’s draft policy on new criminal offences provides some reassurance to would be targets

More information about the expanded notification regime, including the new statement of intent requirements, will follow separately later in the year.

In addition to sponsors and trustees of defined benefit (“DB“) schemes, these developments will be relevant to company directors and others involved in making business decisions for companies that sponsor DB pension schemes.

Key takeaways

Regulator’s proposed approach to the new criminal offences

The Regulator has written the draft policy carefully to avoid tying its hands in relation to future investigations and prosecutions. An element of doubt remains, therefore, about exactly how the Regulator will use its new criminal powers come into force, which is currently expected to happen in October 2021.

That said, aspects of the draft policy attempt to address some of the concerns about the wide scope of the behaviour which can, in principle, be caught the new criminal offences and provide a degree of reassurance to directors and others who could find themselves the subject of a criminal investigation.

• Recognition that the new criminal offences are not intended to achieve a fundamental change in commercial norms or accepted standards of behaviour
  • Helpfully, the draft policy picks up some of the statements that the Government made as the new offences made their way through Parliament, confirming that the Regulator’s approach will take into account its understanding that the new offences “were not intended to achieve a fundamental change in commercial norms or accepted standards of commercial behaviour“.
  • The draft policy also confirms the Regulator’s understanding “that they [the two main offences] were aimed at enabling us to address the more serious intentional or reckless conduct that was already within the scope of our contribution notice powers”. Although the Regulator’s past approach to contribution notices is no guarantee of how it will act going forwards, to put this last statement into context, the Regulator has issued three contribution notices since it was given its current powers in 2005.
• ·Confirmation that the Regulator considers that broadly the same type of behaviour will be in scope of the new criminal offences as is currently in scope of the current (civil) contribution notice regime
  • The draft policy confirms that the Regulator would expect to consider a case for prosecution in broadly the same circumstances as it would consider seeking a contribution notice (a financial contribution under the current, civil, anti-avoidance regime). This is consistent with the way in which the new criminal offences are drafted – much of the same language is used in the new criminal offences as is used in the current contribution notice legislation. This means the Regulator’s starting point for the type of behaviour which it will view as being in scope for investigation and prosecution would be wide.
  • In practice, where corporate transactions currently give rise to material detriment to the pension scheme, the risk of a contribution notice being imposed is generally low if the pension scheme has been properly considered and appropriate mitigation has been provided. The express parallels drawn with the current contribution notice regime in the draft policy does, therefore, also provide a degree of reassurance that the risk of criminal prosecution should be correspondingly low where similar consideration and mitigation have been provided in the context of standard corporate transactions.
• Further guidance on what amounts to a “reasonable excuse”
  • Under the new offences, if the Regulator is unable to establish to the criminal standard (beyond reasonable doubt) the suspect has a reasonable excuse for acting (or failing to act) in the way that they did, the Regulator will not succeed in making out the new offences. The availability of this exception will be key in practice, given how wide the scope of the new offences is as a starting point.
  • The draft policy provides some helpful guidance in this area, pointing to the following three factors as being particularly relevant when assessing whether a suspect has a ‘reasonable excuse’:
    • whether the detrimental impact on the scheme/likelihood of 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 – one of the examples given of detriment which would be considered incidental (and therefore point to there being a reasonable excuse) is the employer’s business being harmed by “ordinary business activity conducted on arm’s length terms by an unrelated party” (for example a lender terminating a lending arrangement or key supplier or customer terminating a business relationship)
    • The adequacy of any mitigation provided
    • where no, or inadequate mitigation was provided, whether there was a viable alternative which would have avoided that (if there was a viable alternative which wasn’t implemented, that would suggest a lack of a reasonable excuse).

Further detail on the employer resources test

The employer resources test is one of two new grounds on which the Regulator will be able to issue a contribution notice once the provisions come into force, currently expected to happen in October 2021.

• Proposal for an employer’s resources to be based on normalised profits before tax
  • The Government is proposing that the normalised profits before tax (profits with non-recurring or exceptional items removed) will constitute an employer’s resources. The Government has said that this is something that industry should be familiar with and that it will allow for the test to have a higher degree of specificity and to minimise uncertainty. Under the draft regulations as currently drafted, the Regulator would determine whether an item should be treated as non-recurring or exceptional.
  • For the employer resources test to be met, the Regulator will need to establish that an act or failure to act reduced the value of the employer’s resources and that that reduction was material relative to the estimated section 75 debt. The consultation sets out a proposed approach for how the Regulator will establish that the value of the employer’s resources has reduced – broadly the normalised profits before tax absent the act in question would be compared with position taking the act or failure into account. The consultation proposes that the Regulator would put forward an argument on whether any reduction is material to the estimated section 75 debt based on the particular facts of the case (as is currently done with the material detriment test).
  • The consultation confirms that policy intention behind the introduction of the employer resources test is to address specific difficulties which the Regulator has faced when seeking to impose contribution notices under the current regime. In particular, the difficulty it has faced with demonstrating the impact of corporate transactions on the eventual likelihood of scheme benefits being paid out – often a long time into the future.

Future developments in relation to expanded notification regime

Although recent developments fill in some important gaps about how the new, tougher regulatory regime is likely to operate in practice, a number of gaps still remain, including detail about how the new notification regime (including the new statement of intent requirements) will work. This will be a significant area in practice for those involved in transactions involving DB schemes and will be an area to watch. The Government has said that it will publish regulations on this aspect of the regime ‘later in the year’, but has not currently provided any more detailed timing.

For more information about the Pension Schemes Act 2021, please see United Kingdom: Pension Schemes Act 2021 becomes law – Baker McKenzie InsightPlus