NEWS   |    November 3, 2021

The Pensions Regulator enforcement policies consultation: background, key aspects and what happens next

What is the background to the consultation?

Earlier this year, PSA21 was introduced. It is one of the biggest and most significant pieces of legislation in the pensions landscape for several years. Perhaps the most talked about, and most controversial, part of PSA21 is the Pensions Regulator’s new powers, in particular its power to bring criminal proceedings and issue fines of up to £1m for certain actions and offences.

Many in the wider pensions industry have questioned how the Pensions Regulator is going to use its new powers. There have already been consultations concerning a number of aspects of PSA21. It was in response to its most recent consultation on the investigation and prosecution of criminal offences that the Pensions Regulator received requests for clarification on how the powers available to the Pensions Regulator will interact where there is more than one option available.

The consultation specifically deals with the following new draft policies:

  • Overlapping powers policy;
  • Monetary penalty powers policy; and
  • Information gathering powers policy.

What is being proposed and why? What are the key aspects?

Overlapping powers policy

In the consultation, the Pensions Regulator notes that situations will arise where it can use a combination of or all of the following powers based on the same set of facts:

  1. Issuing statutory notices (i.e. contribution notices, improvement notices etc.);
  2. Issuing financial penalties (fixed and escalating); and
  3. Issuing criminal proceedings.

The draft policy attempts to explain when the Pensions Regulator will choose to use certain powers over others (i.e. choosing to instigate criminal proceedings rather than issuing a contribution notice). The consultation avoids being prescriptive and instead talks about the type of factors that may influence a decision.

Some key points to note from the consultation are:

  • The consultation notes that statutory notices are primarily directed towards securing an action, outcome or providing a remedy, whereas financial and criminal proceedings are primarily meant as punishment for more serious behavior;
  • If there has been a breach of legislation and there are aggravating factors such as previous beaches, an ongoing pattern of non-compliance or dishonesty, the Pensions Regulator may move immediately to criminal proceedings;
  • For breaches of requirements set by the Pensions Regulator, it may immediately seek to impose fixed and escalating financial penalties or go straight to criminal proceedings for the most serious cases of deliberate and wilful conduct;
  • If an offender, who has breached a requirement set by the Pensions Regulator, is a professional subject to rules of conduct that emphasise the importance of compliance of law, the Pensions Regulator would typically consider criminal proceedings; and
  • For avoidance offences, if both regulatory and criminal proceedings are pursued, the Pensions Regulator will usually exhaust the criminal proceedings before seeking any regulatory remedy such as a contribution notice.

Monetary Penalty Powers Policy

The Pensions Regulator, for some offences and other breaches under PSA21, has the power to issue fines of up to £1m. The consultation explains how the Pensions Regulator will decide at which level to set fines and the factors that will influence that decision.

For non-payment of contribution notices, the size of penalty will be directly linked to the amount due under the contribution notice. The penalty value will be fixed at 20% of the value of the contribution notice, capped at £1m. However, this cap is reduced to 10% of the value of the contribution notice and capped at £0.5m if the contribution notice is paid before the Determinations Panel hearing to consider the penalty.

For avoidance of employer debt or conduct risking accrued scheme benefits, the financial penalty is based on the following bands:

  • Band HF1: low culpability / low harm: £100,000 – £400,000
  • Band HF2: high culpability / low harm or low culpability / high harm: £250,000 – £650,000
  • Band HF3: high culpability / high harm: £400,000 to £1m.

The consultation lists what might constitute low/high culpability and low/high harm (in relation to the scheme and saver outcomes). Aggravating and mitigating factors will also be taken into consideration.

The consultation proposes that a breach of information gathering powers would be subject to the same bands except there is a “Band R” for a breach of a regulatory requirements with minimal harm to the scheme which could result in a financial penalty of £0 – £100,000.

Information gathering powers policy

The information gathering policy sets out how the Pensions Regulator will approach its use of the following powers:

  • Issuing Information Notices;
  • Issuing Interview Notices;
  • Inspecting premises; and
  • Obtaining warrants.

Some key takeaways from the consultation:

  • Any pre-existing documents obtained or provided through the use of these powers are admissible in any subsequent proceedings, whether regulatory (including financial penalties), civil or criminal proceedings;
  • A person is not required to produce any document which is a ‘protected item’ as defined in s311 of PA04 i.e. materials which are subject to legal professional privilege; and
  • Interviews in relation to the use of criminal powers will take place in accordance with the relevant Code of Practice issued under the Police and Criminal Evidence Act 1984.

What are the implications for pension schemes and what happens next?

The consultation is open until 22 December 2021. The consultation, along with inviting general comments, asks for responses to various questions. Feedback and comments will be considered and the policies will be finalised in early 2022.

The criminal offences came into force on 1 October 2021 and it is unlikely that we will see the Pensions Regulator seeking to use its powers before the enforcement policies have been finalised.

When the final policies become available, it will be worthwhile for employers, trustees and anybody with any contact with defined benefit schemes reading the final version. It is a waiting game to see if the Pensions Regulator utilises its powers under PSA21 more than it has its existing moral hazard powers, but it is important to be aware of when and how these powers might be enforced.

This article was first published by LexisNexis UK (behind paywall).

Read Rhiannon’s article in LexisNexis.

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.

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