What employers in distress need to know: Pension Schemes Act 2021

The COVID-19 pandemic has led to lots of businesses shutting or operating a reduced service for nearly a year and, as a result, distressed employers may be undertaking restructurings to try to survive. Any business with an employer of a UK defined benefit ("DB") pension scheme in its corporate group, will need to be mindful of the Pension Schemes Act 2021, which received its Royal Assent and became law on 11 February. The Act will make some significant changes to the pensions world, most of which will be brought into effect and fleshed out through Regulations and guidance from the Pensions Regulator ("tPR"). This article briefly covers the provisions of the new Act which could be relevant to a company in distress which has a DB pension scheme in its corporate group.

A new, stronger tPR

The Act gives tPR stronger powers, in particular it introduces new criminal offences relating to DB pension schemes. Employers will want to be aware of these provisions, in particular because they are expected to have an impact on restructurings and deter employers from "dumping" their pension schemes. Although the new Regulator powers and criminal offences will not necessarily be enforceable outside the UK, they are likely to have an impact on the actions of the decision makers of a company where a company has a DB pension scheme in the UK.

The Act introduces the new criminal offences set out below.

Avoidance of a statutory s75 employer debt

This offence applies to any person who acts or fails to act with the intention of preventing the recovery of the whole or part of a s75 debt, prevents such a debt becoming due or reduces/compromises the debt. There is a defence to this criminal offence of "reasonable excuse". tPR is expected to issue guidance on the new criminal offences and the reasonable excuse defence in due course.

There has been lots of concerns raised about this offence, including in light of the fact that this offence applies to any person. This means that it could, as you would expect, capture routine corporate activities by parties involved with pension schemes, such as trustees and sponsoring employers. However, it is also possible that other parties, such as a bank lending to a sponsoring employer, insurers and a company wanting to buy a company with a DB pension scheme could be caught if there is a DB pension scheme supported by an employer in a corporate group.  It remains to be seen if Regulations or tPR's guidance, when published, will seek to restrict the far-reaching application of this criminal offence.

Conduct risking accrued scheme benefits

This offence applies where a person acts in a way which detrimentally affects, in a material way, the likelihood of accrued scheme benefits being received provided the person knew, or ought to have known, that the act would have that effect. This goes beyond recklessness. Again, as with the avoidance of a statutory employer debt offence, there is the reasonable excuse defence and the offence applies to any person including any decision maker in a company which has a company in the same corporate group with a DB pension scheme. 

Failure to comply with a contribution notice ("CN")

The Act also introduces a criminal offence of failing to comply with a CN as well as two new grounds to allow tPR to impose a CN (if it is reasonable to do so). These new grounds are:

• the "employer insolvency" test which allows a CN to be issued where, immediately after an act or failure to act, if the employer was to suffer a hypothetical insolvency event triggering a statutory s75 debt and tPR is of the opinion that the act or failure to act materially reduced the amount of the s75 debt which the scheme could recover; and
• the "employer resources" test which allows a CN to be issued where tPR is of the view that an act or failure to act would have reduced the value of the employer's resources and this reduction is material relative to the estimated s75 debt in relation to the scheme.

There is a statutory defence to both these new grounds where a person gave due consideration to the act or failure to act and took all reasonable steps to eliminate or minimise the potential for the act or failure to act to have that impact. However, companies looking to restructure which have a DB pension scheme in their corporate group should note that there is no express exclusion for the permitted employer debt apportionment arrangements, deferral arrangements or actions taken to prevent insolvency events.

What happens if these new laws are broken?

If a person is found guilty of these criminal offences, they can be imprisoned and/or have an unlimited fine imposed on them. This is in addition to tPR's ability to impose a civil penalty of up to £1m. 

It remains to be seen how these new powers will be used by tPR but it is clear that these new powers may impact decision makers in a distressed company. 

Notifiable events regime

The Act also broadens the scope of the current notifiable events regime which could also have an impact on restructurings and how pension schemes are treated going forward. The notifiable events regime is extended to require the "appropriate person" (i.e. the sponsoring employer or associated employer) to give notice to tPR:

• of any notifiable event, as soon as reasonably practicable after the relevant person becomes aware of it – the relevant person being the person giving the notice;
• of any material change in a notifiable event or in the expected effects of a notifiable event. Again this is to be given as soon as reasonably practicable after the relevant individual becomes aware of the material change; and
• if a notifiable event is not going to, or does not, take place as soon as reasonably practicable after the person giving notice becomes aware of the material change.

The detail will be set out in Regulations but it is expected that the events caught will include the disposal of business/assets and granting of security in priority to a scheme/employer debt.

This reporting duty could apply in respect of companies in an employer's corporate group and parties linked to directors so again, having this extra layer of consideration in the decision making process is likely to have an impact on decisions taken during any restructuring.

Conclusion

The Act was hotly debated during its passage through Parliament based on, for example, fears that the criminal offences undermine the UK's rescue culture. However, these objections were rejected on the basis that it is important that, where the elements of an offence are met, the responsible person should be punished no matter who has committed the offence. It was also emphasised that it is for tPR to prove that an excuse is not reasonable (i.e. it will be presumed that a person has a reasonable excuse for taking an action or failing to act unless proved otherwise). It is expected that, in reality, tPR is likely to only exercise its new criminal powers where somebody undertakes an act which is undeniably criminal as opposed to reasonable people doing their best but falling foul of the law but time will tell. tPR's guidance is certainly eagerly awaited!