TPR’s approach to the investigation and prosecution of the new criminal offences – Sackers’ response to consultation

Background

The following two new criminal offences are being introduced by section 107 of the Pension Schemes Act 2021 (as new sections 58A and 58B respectively of the Pensions Act 2004):

• avoidance of employer debt, and
• conduct risking accrued scheme benefits

both of which are punishable by an unlimited fine and/or up to seven years in prison.

TPR is consulting on its draft policy approach to the new offences, including how it expects to investigate and prosecute them.

In this response

• General comments

General comments

Industry concern about the two new criminal offences

There has been widespread industry concern about the breadth of the drafting of section 107 of the Pension Schemes Act 2021, both in terms of the potential to capture ordinary business activity as well as a broad spectrum of targets. These concerns were raised in a Joint Industry Group letter to the DWP dated 11 December 2019 and debated at length in the House of Lords.

In response to these concerns, the Government confirmed that TPR would publish specific guidance on its approach to prosecuting the new offences and consult on that guidance. Therefore, TPR’s draft policy approach is designed to fulfil the Government’s commitment to clarify the scope of the offences and, as such, its level of clarity and detail is crucial to the pensions industry.

Consistency with policy intent

When introducing the Bill into Parliament for the first time, the Queen’s speech on 14 October 2019 noted that the policy intent underpinning the two new criminal offences is “to tackle irresponsible management of private pension schemes” by enhancing TPR’s powers “so they can respond earlier when employers do not take their pension responsibilities seriously, including taking tougher action against those who recklessly risk peoples’ pension benefits”. The background briefing note to the Queen’s Speech in December 2019 repeated that intent, “including putting lengthy jail terms on the table for reckless bosses who plunder people’s pension pots, thereby building greater trust for saving in pensions”.

In our view, TPR’s overall approach is reassuring and in keeping with that stated policy intent. In particular, we note that the new offences are not intended to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour in the UK. Rather, they are very much targeted at the more serious intentional or reckless conduct that is already within the scope of TPR’s existing anti-avoidance powers, such as contribution notices (“CN”). We welcome this confirmation by TPR.

However, as we set out below, there are some aspects of TPR’s draft policy which we feel would benefit from further detail and/or clarification, including additional examples to help better illustrate the circumstances in which TPR may or may not use its powers.

Lack of judicial guidance on existing anti-avoidance powers

The draft policy draws parallels with TPR’s existing anti-avoidance powers, noting that “the new offences have some similar elements to the existing provisions in section 38” and that TPR’s “approach to the prosecution of the new offences will be closely linked to [its] existing CN power”. As such, TPR “would expect to consider a case for prosecution in broadly the same circumstances” as it would contemplate seeking a CN. In particular, “in deciding whether the material detriment test is met for the purposes of the offence under section 58B”, TPR will take “the same approach as when considering issuing a material detriment CN under section 38”.

It is important to bear in mind here that there is currently very little judicial guidance on TPR’s CN power and the material detriment test. The draft policy refers to both Code of Practice 12 (Circumstances in relation to the material detriment test) and related guidance which set out the circumstances in which the material detriment test is likely to be met. However, this guidance dates from 2009 and is very brief.

In addition, there are very few publicly available cases which have considered the application of the material detriment test, either by the Determinations Panel or by any Court. So the circumstances in which a CN might be imposed using this test remain uncertain, and it is difficult to draw any clear inferences as to what might be in or out of scope. As a consequence, comparing TPR’s material detriment CN test with the section 58B offence has its limitations, making further and more detailed examples highly desirable.

Expanded examples and more commentary on grey areas

Whilst the behaviour outlined in the draft policy helps to reinforce the intended approach to target the more serious intentional or reckless conduct that is already within the scope of TPR’s existing anti-avoidance powers, the examples mostly fall at two ends of the spectrum:

• behaviour which would be most obviously caught, and
• in contrast, behaviour which is highly unlikely (but for very specific circumstances) to be caught.

Against the backdrop of meagre judicial guidance on the material detriment test, it would be useful to have further examples outlined, including borderline and less obvious ones, as well as more commentary around the potential grey areas (ie scenarios which more closely skirt the boundary between acceptable and unacceptable behaviour). It is these grey areas which are likely to prove the most concerning for the pensions industry in practice, having the most potential to stifle legitimate corporate activity.

In particular, it would be helpful to have examples which are more finely balanced along with a list of factors which might tip the scales either way. This could include a list of typical corporate events and their potential to be considered for investigation, alongside factors which would influence that decision.

Furthermore, some of the examples given in the draft policy could be clearer and more detailed. One example used to illustrate behaviour potentially caught by the new offences is “stripping of assets from an employer”, but context and degree here will be vital in determining whether the legal tests for imposing liability are potentially met.

Reasonable excuse

TPR puts forward three factors which will be significant in determining whether there is a reasonable excuse for an act or course of conduct (including a failure to act), one of which is “whether the detrimental impact on the scheme/likelihood of full scheme benefits being received was an incidental consequence of the act or omission, as opposed to a fundamentally necessary step to achieve the person’s purpose”. Again, further guidance and more detailed examples around the concept of what is “incidental” would be most welcome, as well as instances which could go either way.

Another factor which will be significant in determining whether there is a reasonable excuse is “the adequacy of any mitigation provided to offset the detrimental impact”. The draft policy includes examples of scenarios where the mitigation might be considered adequate.

In a similar vein, it would also be helpful to have examples of scenarios where the mitigation might be considered inadequate. We note that TPR would assess mitigation here in a similar way to clearance applications. Again, this may currently be of limited assistance given that so few details make it into the public domain.

The final factor in determining whether there is a reasonable excuse is whether there was a “viable alternative which would have avoided or reduced the detrimental impact”. The examples given here are helpful and balanced, eg the example of an employer facing a liquidity crisis.

Interaction with the clearance regime

Unsurprisingly, the clearance regime under section 42 of the Pensions Act 2004 does not apply to the new offences under sections 58A and 58B. However, TPR has confirmed that it would “not usually expect to prosecute anyone under section 58B who could establish a statutory defence to a material detriment CN under section 38B”.

In practice, where the material detriment test is potentially in play for a CN, it would be open to employers or trustees to apply for clearance. Whilst not binding on TPR or other potential prosecutors (not to mention the Court), obtaining clearance would provide some comfort.

We anticipate that, notwithstanding its draft policy, TPR may well experience a surge in clearance applications once section 58B is in force. Is TPR gearing up for this possibility? In our view, encouraging an open dialogue with employers / trustees at an early stage might help to deter problems arising further down the line. That said, we recognise that a new notifiable events regime is on its way, with a consultation on draft regulations due later this year.

Publishing details of investigations and cases which do not go to Court

TPR notes that it will update the draft policy “over time to reflect court decisions in relation to the offences and [its] experience”. As part of this, will TPR provide regular updates on investigations and also publish full and balanced reports (even if on an anonymised basis) of cases which do not go to Court so that the pensions industry is able to build a body of anecdotal evidence and experience?

Although we appreciate that TPR issues regulatory investigation reports from time to time, they tend not to provide much detail around uncertain legal issues. We note that, for example, the regulatory investigation report for Silentnight provides some detail of TPR’s and the trustees’ case against the “Targets” but almost nothing of the Targets’ case. It therefore lacked balance, providing little insight as to what might be the correct application of the material detriment test in those, or similar, circumstances.

Evidence pre-dating commencement

The draft policy notes that “evidence pre-dating the commencement date of the new offences” may be relevant to TPR’s “investigation/prosecution of actions after that date, for example if it indicates someone’s intention”. In practice, it will be for the Court to decide whether evidence pre-dating commencement is admissible in any particular case and the draft policy should perhaps reflect this.

Guidance on civil penalties and interaction between the two sets of sanctions

The draft policy notes that TPR’s approach to the investigation and prosecution of the criminal offences under sections 58A and 58B does not apply to any of its other powers.

Under sections 58C and 58D of the Pensions Act 2004, TPR will have the power to issue a civil penalty of up to £1 million as an alternative to the offences under sections 58A and 58B respectively. The Pension Schemes Act 2021 will also introduce the potential for a civil penalty where, in certain circumstances, a person knowingly or recklessly provides TPR with information which is false or misleading in a material particular.

We would welcome clarification as to when the civil penalties might be deployed. The draft policy simply refers to TPR’s Monetary Penalties Policy, but this has not been updated since August 2017 and so does not directly cater for the new civil penalties. We would also welcome greater detail in respect of the interaction between the civil penalties and the criminal offences.