Associate Danyal Enver writes in Global Banking & Finance Review on the extent of the Pensions Regulator’s new powers
The Pension Schemes Act 2021 will come into force in Autumn this year and its contents should be of concern to any company, whether UK based or international, if they are in any way connected to a UK defined benefit (DB) pension scheme. The Act will significantly widen the enforcement powers of the Pensions Regulator, which can be used (broadly) against any companies in the same corporate group as a DB scheme employer and require them to fund the scheme. The Act will also introduce fines of up to £1m for various breaches of the Act, as well as criminal penalties for wrongdoing in relation to a DB scheme.
More Power to the Pensions Regulator
The Act will significantly strengthen the existing legal powers of the Pensions Regulator to investigate companies that are participating employers in a DB scheme. The Regulator could also investigate any other entities or individuals that it deems to be holding or likely to be holding information relating to a DB scheme, which could include banks and lenders. As part of an investigation, the Regulator will be able to require a meeting (with a risk of a fine for non-attendance) and for its questions to be answered. It will also have the power to inspect premises at any reasonable time where documents thought to be relevant to the administration of a DB scheme employer are being held. And given the prevalence of working from home, it is possible that private homes (generally exempt from inspection) could be targeted. The Regulator’s inspector can demand that documents are provided, take copies of documents and require further explanation from any person present at the premises. It is a criminal offence to refuse to co-operate with such an inspection without a reasonable excuse for that refusal.
The Act will also strengthen the Regulator’s “moral hazard” powers, i.e. the ability to ‘pierce the corporate veil’ and require a connected and/or associated company, and in some cases even directors personally, to pay money into, or otherwise support, a DB scheme, regardless of whether they are UK based or located internationally. One of the Regulator’s moral hazard powers that has been widened by the Act is the addition of two new grounds on which it can issue a ‘contribution notice’, if reasonable to do so. Contribution notices effectively compel the target to pay money into a DB scheme (in circumstances where it would otherwise have no legal obligation to do so) where some form of material detriment to the scheme has been caused. Through the Act, the Regulator may now issue such a notice on the basis of a new “employer insolvency test”. If a DB scheme employer had become insolvent immediately after an act or failure to act (thereby triggering a debt due to the scheme as creditor), then the test is triggered where that act or failure would have materially reduced the amount of the debt likely to be recovered. The second new test, a “employer resources test”, applies where an act or failure to act causes the value of the employer to materially reduce relative to the debt due to the scheme if the employer became insolvent. This will mean that corporate groups that include a company that participates in a DB scheme as an employer (and whether or not benefits are still accruing for employees in that scheme), will need to carefully consider the new (and existing) law to avoid triggering a contribution notice test. This will include taking care even with routine or ‘business as usual’ commercial activity, such as routine M&A, refinancing, granting security, paying dividends and group restructuring etc, as well as activities when in a distressed situation such as prepack administrations and other insolvency processes.
Criminal Offences and Bigger Fines
The Act will establish a new set of criminal offences, punishable by imprisonment for up to 7 years (and/or an unlimited fine) for any reckless conduct which is deemed to have put DB scheme’s benefits at risk, or to have intentionally reduced or compromised the employer’s debt to the scheme. Additionally, the target of these criminal offences can be anyone acting without reasonable excuse, including company directors, HR managers, professional advisers, banks, investors, commercial counterparties and all other third parties.
It will be of vital importance, therefore, that any employers of a DB scheme, group companies, directors, lenders and advisers take the necessary advice, and document an appropriate audit trail to ensure that their actions can be later defended from the scrutiny of the UK courts, if necessary.
The Act empowers the Regulator to issue much higher fines than it can at the moment. At present, the Regulator’s fines are capped at £5,000 for individuals and £50,000 for companies. The Act enables fines for up to £1 million for offences including conduct which risks DB scheme benefits, failure to comply with a contribution notice, and recklessly providing the Regulator with false information. Fines for criminal behaviour can be unlimited.
Notifying the Regulator
Under existing legislation, certain events, such as the share sale of an employer participating in a DB scheme must be notified to the Regulator. The Act will add two new events which require notification to the Regulator: the sale of a material proportion of the business or assets of a company with a material funding responsibility to the DB scheme, and security being granted in priority to the DB scheme trustees. Separate and more detailed notification obligations, setting out any adverse impact on the scheme, will also be required. These notifications are aimed to give the Regulator an early warning of corporate activity. This affords the Regulator an opportunity to investigate and intervene if it suspects the DB scheme’s employer is being weakened or the likelihood of the scheme benefits being received is being threatened by the event being notified. The Regulator will be able to impose fines of up to £1m for failure to notify.
Regulatory Power Must Be Considered
The Pension Schemes Act has given the Regulator more power to investigate, enter properties, demand documents, and use wider moral hazard powers against employers, individuals and companies associated with employers of DB schemes. It can enforce higher fines and now seek to prosecute anyone for criminal offences for reckless behaviour in relation to a DB scheme. In light of the Regulator’s ability to reach entities and individuals outside the UK, the Act is also relevant to international groups carrying out any corporate activity. They could be required to report that activity to the Regulator and might later find themselves being asked to answer (and pay) for their actions if they have detrimentally affected the DB scheme or its employer.
This article was first published in Global Banking & Finance Review, on 24 March. Read Danyal’s article here.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.