Pensions Criminal Offences Policy and Consultation Paper

The Pension Regulator publishes final policy on criminal offences and a consultation on its approach to its new powers

1. Criminal Offences Policy

The Pensions Regulator  (the “Regulator”)  has published a policy to provide guidance on its approach to the investigation and prosecution of the new criminal offences (i) avoidance of employer debt (the new s.58A of the Pensions Act 2004) and (ii) conduct risking accrued scheme benefits (the new s.58B of the Pensions Act 2004) as introduced by the Pension Schemes Act 2021.  Both of these offences carry a maximum penalty of unlimited fines and/or seven years in prison. The Regulator is able to prosecute for acts that took place on or after 1 October 2021.

The new offences are only applicable in respect of an occupational pension scheme that is not a money purchase scheme and will apply where:

• Someone has done or failed to do something which meets the required "act element";
• The person has the required "mental element"; and
• The person does not have a reasonable excuse for their actions.

It remains to be seen how the Regulator will exercise its new powers to investigate and prosecute criminal offences.  However, the Criminal Offences Policy provides some reassurance that major changes to normal business activity are not expected:

"The offences in sections 58A and 58B are potentially very broad in scope, due to the wording of the ‘act elements’ (described below). However, the vast majority of people do not need to be concerned - we don’t intend to prosecute behaviour which we consider to be ordinary commercial activity. We will investigate and prosecute the most serious examples of intentional or reckless conduct that were already within the scope of our CN [contribution notice] power, or would be in scope if the person was connected with the scheme employer.".

What are the key elements of the offences?

1. The "act elements"?

For an offence under s.58A the "act element" will be met if the person does an act that:

• Prevents the scheme from recovering all or any part of the debt that is due from the employer under section 75 of the Pensions Act 1995;
• Prevents that debt becoming due;
• Compromises or otherwise settles that debt; or
• Reduces the amount of the debt which would otherwise become due.

Whilst under s.58B a person will have the requisite "act element" if they act or engage in a course of action that detrimentally affects in a material way the likelihood of accrued scheme benefits being received.

2. The "mental elements"

The mental element for a s.58A offence will be met if the person intended their act to have the relevant effect whereas for a s.58B offence the required mental element is where the person knew or ought to have known that their act would have a materially detrimental effect.

3. A reasonable excuse?

It will be of some comfort that regardless of whether both the act and mental element have been fulfilled for either offence, no offence will have been committed if the person had a reasonable excuse. The burden will be on the prosecution in order to prove the person did not have a reasonable excuse but the person in question will be expected to explain their actions and put forward sufficient evidence of any matters which might amount to a reasonable excuse.

Whether an excuse is reasonable will be fact and circumstance specific to each individual case and ultimately determined by the criminal courts. The Regulator will form its own view as to whether the person had a reasonable excuse for its actions and will take into consideration the following:

• What the person’s reasons were for their actions and the reasonableness of those reasons.
• The circumstances in which the act took place e.g. the Regulator will be mindful of any time constraints.
• The person’s own circumstances e.g. their duties, skills and experience, and relevant attributes.

The Regulator has also specified three factors which it deems will be "significant" when making a determination on reasonableness:

1. The extent to which the detriment to the scheme was an incidental consequence of the act or omission
   The Regulator notes that the more incidental the detriment was to the person’s objective then the more likely it would lend itself to being a reasonable excuse. How central the detriment is deemed to be to the person’s objective is said to be fact dependent but the closer the person is to the scheme the more central the detriment is likely to be viewed.
   
   
2. The adequacy of any mitigation provided to offset the detrimental impact
   The more the detrimental impact has been mitigated (and the earlier this is done) the more likely the person is to have a reasonable excuse. The Regulator will take into account whether the scheme has been treated fairly in relation to other stakeholders of the employer when assessing if the mitigation has been adequate. The circumstances as they were at the time and what would have been reasonable for the person to have known with reasonable enquiries will be considered.
   
   
3. Where no, or inadequate, mitigation was provided, whether there was a viable alternative which would have avoided or reduced the detrimental impact
   Where the Regulator sees that a person could have taken a viable alternative course of action that would have had a less detrimental effect, this would suggest that the person did not have a reasonable excuse but the Regulator also recognises that in some scenarios there may not be an alternative which is less detrimental to the scheme. The person concerned will only be expected to have considered viable options to their own actions and will not be expected to have knowledge above what would have been reasonably expected on reasonable enquiries at the time.

   The Regulator also recognises that the extent to which alternatives could be explored will be dependent on the context, for example, it may be the case in a restructuring scenario that events are fast-moving and that decisions need to be made quickly in order to avoid significant destruction of value which would be detrimental to all stakeholders, including pension scheme creditors. When assessing whether an alternative course of action is viable the Regulator will consider the person’s existing rights, their duties or obligations to the scheme, and their duties or obligations to others, and the manner in which they reasonably could have exercised their rights.

   However, the Regulator will also take into account other factors such as any communication or consultation with the trustees prior to the act taking place, whether the person owed any fiduciary duties to the scheme and if so, if they acted in accordance with those duties and if acting in a professional capacity whether they acted in accordance with their professional duties, conduct obligations and ethical standards.

   It is important to note that it is not just the person who commits the act itself that can be prosecuted. The offences also apply to a person who helps or encourages someone to commit either offence unless they have a reasonable excuse for doing encouraging the offence.

The Regulator’s Approach to Investigations

The policy notes that the Regulator will start any investigation by gathering information and establishing the facts and they could not foresee circumstances where there would not be an opportunity for any suspect to provide an explanation for their actions prior to the Regulator making a decision to prosecute. There is therefore an opportunity for prosecution to be ruled out an early stage but if it were to be proceeded with then this would not be a surprise to the parties involved. Before deciding to prosecute, the Regulator must also consider whether they have sufficient evidence with which to prosecute, meaning they are satisfied that a conviction is likely, and that the prosecution is in the public interest.

The Regulator has also published a consultation on its approach to some of the new powers introduced by the Pension Schemes Act 2021 which came into force on 1 October 2021 and how these interact with their existing  powers.

The consultation considers three draft policies which explain the Regulator’s approach to the following:

1. Overlapping powers – where the Regulator has the option to pursue both criminal and/or regulatory powers in respect of the same set of circumstances;
2. Monetary penalty powers – the Regulator’s new power to impose high fines for information-gathering and avoidance-related scenarios; and
3. Information gathering powers – the use of section 72 notices requiring a person to provide a document/information, interviews and inspections in the context of enforcement cases, including its approach to the new fixed and escalating penalty powers for non-compliance.

The consultation is due to close on 22 December 2021.

The Regulator has regulatory, civil and criminal powers of enforcement in relation to workplace pension schemes and these powers are not mutually exclusive, sometimes they may overlap. An example provided by the Regulator would be where an employer has a defined benefit pension scheme with a significant deficit and the employer sells the whole business with the proceeds being paid immediately to the employer’s parent as a dividend. This scenario could potentially meet the ‘act’ test for a ‘material detriment’ Contribution Notice and be the subject of a prosecution.

In cases where there is overlap the Regulator may have three kinds of powers available to them:

1. the power to issue a statutory notice (other than a financial penalty notice);
2. the power to impose a financial penalty; and
3. the power to bring a prosecution.

A statutory notice is intended to be used in order to direct a person to do something (for example, provide the Regulator with documents) and if this is not complied with then the person may be subject to a financial penalty and/or criminal sanction. The consultation paper notes that financial penalties and criminal sanctions will be used to punish more serious behaviour and to act as a deterrent.

When deciding which powers to use the Regulator notes that it will take into account the nature and effect of each of the powers and what the likely outcome of using each power might be. The policy sets out the Regulator’s proposed approach to other circumstances such as breaches of legislation, directions, restrictions or prohibitions, and provides case examples for further clarity.

B. Monetary Penalty Powers Policy – High Fines for Avoidance and High Fines for Information Gathering

The Regulator has the power to issue a financial penalty not exceeding £1 million in certain situations. The policy sets out its approach to enforcing these monetary penalties and how the level of penalty will be determined, for example, where a financial penalty is imposed where there has been an avoidance of employer debt or conduct risking accrued scheme benefits then the value of the penalty will be determined by a band level dependent on the person’s culpability and level of harm caused but also taking into account any mitigating or aggravating factors.

C. Information Gathering Powers Policy

The Regulator will make enquiries in relation to their investigations and may request that information, documentation or an explanation of events be provided to them from persons such as pension scheme trustees or employers as well as others. Examples of information requested might be trustee meeting minutes, investment reports, board resolutions and minutes and/or relevant correspondence.

Sometimes the information will be requested to be provided to the Regulator on a voluntary basis and statements/voluntary interviews may also take place. The Regulator confirms in the policy that should an interview be conducted as part of an investigation into a criminal offence then it would take place under caution and be recorded in line with the relevant Code of Practice under the Police and Criminal Evidence Act 1984.

The Regulator also has a number of statutory investigative powers in both regulatory and criminal cases for example:

• Issuing Information Notices which require a person to provide documents and/or information relevant to the Regulator's functions;
• Requiring a person to attend an interview; and
• Undertaking an Inspection to obtain the information they require (supported by a warrant if one has been obtained).

The policy provides further clarity as to the circumstances in which these powers may be used and what will be expected to be provided for each request. The policy sets out the Regulator’s approach to non-compliance with any of the above requests which could result in a financial penalty and/or criminal prosecution.

The consultation is due to close on 22 December 2021 and the finalised policies should be available early next year.