The Two New Criminal Offences Created by the Pension Schemes Bill.
What’s the story?
After progressing through parliament for most of 2020, the Pensions Schemes Bill is reaching the final stages of becoming law. This article will not discuss the Bill in its entirety, rather Clause 107 which introduced two new criminal offences relating to defined benefit pension schemes: avoiding an employer debt without reasonable excuse; and conduct that risks accrued benefit schemes. Both of these offences carry a maximum sentence of seven years!
The first of these offences, avoiding employer debt, arises if any person prevents the recovery of, compromises, or reduces a debt owed by an employer to the scheme.
On the face of it, the wording of this offence is particularly broad. For example, ‘any person' is very broad and potentially may include parties beyond the government’s intention, such as trustees and advisors. This casts a wider net than the existing moral hazard powers given to the Pensions Regulator. The moral hazard powers allows the Regulator to compel ‘third parties who are connected or associated to an employer’ into performing an action. It will be interesting to see if the Regulator provides some guidance as to how wide ‘any person’ can be stretched.
In addition to this, the broad wording may catch many legitimate actions which are often undertaken by trustees. For example, often trustees may enter into forms of appointment arrangement when an employer leaves the scheme, under which the remaining employers would agree to take on the outstanding liabilities of the departing party. This could potentially fall foul of the new offence.
It is worth noting that there is a defence of reasonable excuse for this offence. Once again, what constitutes reasonable excuse is open to interpretation by the courts. In a criminal case, this would be for the jury to decide.
The second offence is more interesting. Here, a party is liable if they engage in a course of conduct that detrimentally affects, in a material way, the likelihood of accrued scheme benefits being received, and the person knew or ought to have known that their act or course of conduct would have that effect.
There is a certain element of objectivity that will be required in determining what somebody ought to have known. It will be left to the courts to set the standard in this regard. This aside, the test of the ‘likelihood' of the scheme benefits being received is very wide. In theory, any circumstance which results in a reduction in a scheme’s value would fall foul to the this test. This potentially could affect parties who were not envisioned to be caught by this offence. For example, a major customer of an employer may decide to withdraw their business from an employer, if the employer has a pension scheme that is generally well known, then it is possible to demonstrate that the customer knew or ought to have known that withdrawing their business from the employer would be materially detrimental to the employer’s pension scheme. It is hard to imagine that the government intends that customers could, in theory, be caught under this offence.
Once again, the defence of reasonable excuse applies in this instance. However, as mentioned previously, what constitutes reasonable excuse is up for interpretation.
How will this affect law firms?
The effect of these new offences will be a significant increase in caution. All those involved with defined benefit schemes, from trustees to bankers, will become overly cautious.
Trustees being more nervous could damage the relationships with employers. The inclusion of these offences is strange in light of the additional flexibilities given to distressed companies under the Corporate Insolvency and Governance Act 2020 (CIGA).CIGA provides flexibility for distressed employers to raise finance but trustees, who are often major creditors of employers who sponsor DB pension schemes, could be put off by the risk of facing prosecution.
For firms, the increase in caution will lead to more parties taking legal advice to ensure compliance with the law. The potential cutting of credit lines for distressed companies could see more going into administration. This would increase the demand for lawyers who specialise in areas such company administration and employment law.
Global law firm Freshfields Bruckhaus Deringer noted that the new rules could ’present a significant risk that, instead of protecting DB schemes, could have the opposite effect if pension schemes become a blocker for corporate activity.’ In this respect, the new offences could have an overall negative impact on M&A activity.