Vol 18 (2021) - Issue 6

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Directors, Insolvency Practitioners and Third Parties Must Tread Carefully as New Pensions Offences Lie in Wait for the Unwary

Synopsis
Since 1 October 2021, directors, lenders, investors, advisers and other parties to restructuring arrangements and corporate activity which may jeopardise the interests of a defined benefit (DB) pension scheme have faced the spectre of criminal prosecution. The new pensions criminal offences and other regulatory sanctions, which came into force just over a month ago, are broadly drafted and are likely to impact the approach to restructurings, transactions, intra-group finance arrangements, lending and security arrangements and other corporate activity which may negatively impact a DB scheme.
Three new pensions criminal offences form the most high profile part of a raft of new regulatory powers and sanctions designed to strengthen the pre-existing regulatory regime and afford greater protection to DB schemes and the Pension Protection Fund (PPF).
Alongside the new offences, the Pensions Regulator (the Regulator) has been given the power to impose fines of up to £1 million in a wide range of circumstances, enhanced powers to require DB sponsors and related parties to make immediate payments into their scheme and extended information gathering powers.
The government is also planning to introduce new reporting requirements in relation to certain material corporate transactions and the granting of relevant security which will rank ahead of a DB scheme, in April 2022.1 This is likely to mean corporates will be required to notify the Regulator (and their scheme's trustees) and to provide more detailed information about such transactions at a much earlier stage than is typically the case. Multiple notifications are also likely to be required in respect of the same transaction.
Going forwards, parties to restructuring arrangements and other corporate activity which may detrimentally impact a DB scheme need to ensure they have fully considered whether these new offences and regulatory sanctions may be engaged. The Regulator has published a criminal offences policy2 in which it sets out how it will approach the enforcement of the offences of causing a material detriment to a DB scheme and avoiding an employer debt, and in what circumstances.
Despite improvements having been made from the draft policy published for consultation in March, there is still significant uncertainty about how, and when, these offences will be enforced in practice, including:
– What will constitute a 'reasonable excuse' such that actions which are materially detrimental to a DB scheme will not be criminal?
– Could lenders, suppliers and other third parties (such as suppliers) be prosecuted for taking action which is in their own commercial interests where this is materially detrimental to a DB scheme?
– In what circumstances might insolvency practitioners and other professional advisers be in scope?
– How do these new offences and sanctions interact
with directors' duties more broadly?
Although the Regulator has indicated that those involved in, what it considers to be, 'ordinary commercial activity' do not need to be concerned, given the uncertainty that still surrounds the scope and application of these new offences (and the other new regulatory sanctions) a nasty surprise may lie in wait for the unwary.