Variations on a scheme

Variations on a scheme

Key points

What is the issue?

The UK’s Pension Schemes Act 2021 has given significant new powers to regulators, including the power to bring a criminal prosecution against those who engage in activity damaging to pension savers.

What does it mean for me?

Trustees of defined benefit schemes and their sponsoring employers need to understand the new powers and update their processes.

What can I take away?

What can I take away? Although criminal prosecutions will be rare, these are important changes in UK pensions law and pensions are likely to move up the corporate agenda.

 

The Pensions Regulator (TPR) is the UK’s regulator of workplace pension schemes. The recently enacted Pension Schemes Act 2021 (the Act) has strengthened TPR’s powers in relation to defined benefit (DB) pension schemes.[1] This follows a number of high‑profile cases in the UK where members’ pensions have been left in jeopardy following the insolvency of the sponsoring employer.

The Act is widely drafted and could catch day‑to‑day corporate activities where they impact on DB pension schemes, including mergers and acquisitions, making dividend payments, or the granting of intra‑group loans or security.

Trustees and sponsors of DB schemes (and their advisors) need to be aware of the new powers and ensure they have processes in place to ensure they do not become the subject of TPR intervention.

Criminal offences

The Act creates two new criminal offences in relation to occupational (workplace) DB pension schemes.

Offence of avoidance of employer debt[2]

Broadly, this new criminal offence applies where a person performs an act or engages in a course of conduct that prevents the pension scheme from recovering all or any part of an ‘employer debt’. For example, moving company assets out of the reach of the pension scheme.

An employer debt in the context of a UK DB pension scheme is a statutory debt due from the scheme sponsor to the trustees of the scheme.[3] It is payable in certain circumstances specified in legislation, including where the sponsor suffers an insolvency event. The debt is calculated by an actuary and is the amount needed to secure the scheme’s pensions with an insurance company.

A person will only commit an offence if they did not have a reasonable excuse for performing the act or engaging in the course of conduct. TPR expects the reasonable excuse to be clear from contemporaneous records, such as minutes of meetings, correspondence and written advice.

Conduct risking accrued scheme benefits[4]

This criminal offence is committed if a person performs an act or engages in a course of conduct that detrimentally affects in a material way the likelihood of ‘accrued scheme benefits’ being received. This offence is deliberately very broadly drafted. Accrued scheme benefits are the benefits that members have built up in the pension scheme when the offence was committed. A person will only be deemed as committing the offence if they did not have a reasonable excuse.

What are the penalties and who can be convicted?

The penalty on conviction of either offence includes an unlimited fine, imprisonment for up to seven years or both. The offences can be deemed committed by any person except someone acting as an insolvency practitioner. The offences can also apply to a person who helps or encourages someone else to commit the offences, including professional advisors.

TPR’s criminal offences policy

TPR has issued a policy that sets out how it intends to investigate and prosecute the new criminal offences. TPR is more likely to consider its criminal powers where:

  • there is serious harm to the scheme and members as a consequence of the act;
  • the person had extensive involvement or influence in the harm caused;
  • significant financial gains have been 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 Pension Protection Fund[5] has been misled or not appropriately informed or, where TPR is engaged in the matter, there has been a lack of openness and timeliness of communication.

Contribution notices

TPR also has the power to issue a contribution notice to an employer of a DB scheme and those associated or connected with such an employer. A contribution notice is essentially a demand to pay a set amount of money to the scheme. Under the Act, TPR has two new grounds on which it can issue a contribution notice:[6]

  • Employer resources test: broadly, TPR can issue a contribution notice under the employer resources test where an act materially reduces an employer’s resources relative to the amount of underfunding in the scheme.
  • Employer insolvency test: the employer insolvency test looks at the impact of an act on a hypothetical insolvency outcome for the scheme. TPR must be of the opinion that the act in question would have materially reduced the amount of the debt likely to be recovered by the pension scheme.

TPR has said it would expect to issue a contribution notice in the following circumstances:

  • sponsor support is removed, substantially reduced or becomes nominal;
  • weakening of the scheme’s creditor position (i.e., how much the scheme would receive as a creditor of the employer on its insolvency);
  • some instances of paying a dividend or a return of capital by the sponsoring employer; and
  • payments favouring other creditors of the employer over the scheme where no such sums are then due to those creditors.

There is a statutory defence available in relation to both the employer resources and employer insolvency tests.

Notifiable events

The UK government is also proposing to increase the number of events that sponsoring employers must notify to TPR. Sponsoring employers will be required to notify TPR when a ‘decision in principle’ is made:

  • by a controlling company to relinquish control of a sponsoring employer or there is an offer to acquire control of the employer where there has been no decision in principle to relinquish control;
  • by the employer to sell a material proportion of its business (broadly more than 25 per cent of annual revenue) or a material proportion of its assets (broadly more than 25 per cent of the gross value of its assets);
  • by the employer or its subsidiaries to grant or extend security over assets in priority to the scheme. This would mean a fixed or floating charge at a level of more than 25 per cent of either the employer’s consolidated revenue or its gross assets.

‘Decision in principle’ is defined as a ‘decision prior to any negotiations or agreements being entered into with another party’. In practice, it may be difficult to determine at what stage a decision in principle has been made and a notification is required. The changes are expected to come into force in April  2022.

There will also be a new ‘notice and statement’ obligation on employers to give notice and statements to TPR that set out the implications for a DB scheme of certain corporate events, and how any risks to the pension scheme will be managed. The notice and statement requirements will apply when the three notifiable events referred to above are at a more advanced stage, i.e., when the main terms have been proposed and an intention formed.

Conclusions

The new criminal sanctions are not expected to be used other than in extreme cases of wrongdoing that affect underfunded DB schemes. However, the other changes being introduced by the Act, including the notifiable events changes, will require all employers with DB schemes to have robust and joined‑up processes in place to ensure that corporate activity that may impact on DB pension schemes is readily identified and employers can put appropriate mitigation in place.

Trustees also need to be aware of TPR’s expectations and be ready to engage with their sponsor and potentially TPR where corporate decisions and activity impact on a DB pension scheme. Trustees must maintain accurate records of their decision‑making and professional advice taken. This will be important should TPR ever need to investigate their scheme.


[1] A DB pension scheme (sometimes called a final salary scheme) is a workplace pension scheme funded by contributions from the employer and the members where the members receive a defined or guaranteed level of benefit on retirement or death. Any shortfall in the funding is the employer’s responsibility.

[2] s.58A, Pensions Act 2004

[3] s.75, Pensions Act 1995

[4] s.58B, Pensions Act 2004

[5] The Pension Protection Fund is a statutory fund intended to protect members of DB pension schemes if the sponsor becomes insolvent.

[6] ss.38C and 38E, Pensions Act 2004