UK finalises new pensions-related criminal and civil offences: the impact on restructurings

The Pension Schemes Act 2021 (‘the Act’) has received Royal Assent, with the UK government indicating that key provisions will come into force by autumn 2021.

The Act includes a number of provisions that will significantly impact restructuring activity involving financially distressed groups with a UK defined-benefit (DB) pension scheme.

What will change under the Act?

Below are some of the most significant changes being introduced by the Act.

• Two new criminal offences of ‘risking accrued scheme benefits’ and ‘avoidance of employer debt’ will be introduced, each carrying a maximum penalty of unlimited fines and/or seven years in prison. The Pensions Regulator (‘the Regulator’) will also be able to impose civil penalties for such actions of up to £1m.
• The circumstances in which the Regulator can make connected third parties (such as group companies, directors and major shareholders) liable for pension scheme deficits by issuing a ‘contribution notice’ will be significantly widened.
• There will be new requirements to give advanced notification and provide statements to the Regulator about the impact of certain corporate activity on a pension scheme. Failure to comply with these requirements could result in new civil penalties of up to £1m.
• The Regulator’s investigatory powers will be strengthened, and the Regulator will have a power to require any person to attend an interview and a power to inspect records at parties’ premises (including unannounced raids).
• Other new criminal offences have been included in the Act for:
  • failing to comply with a contribution notice;
  • refusing to attend an interview with, or answer questions from, the Regulator; and
  • providing misleading information to the Regulator in relation to notifiable events and the new statements.
• There will also be civil penalties of up to £1m when misleading information is given to pension scheme trustees.

Business activities of groups with a UK DB pension scheme will therefore become much more challenging. Directors of corporate groups, trustees or even third parties such as banks and professional advisers could face significant criminal or civil liability for acts or omissions that might impact the security of UK DB pension schemes.

The Act’s impact on restructurings

As a result of these changes, it will be more important than ever for corporate groups facing financial distress and those who deal with them to ensure that the impact of restructuring activity on their UK DB pension schemes is carefully considered, appropriately mitigated and properly documented with a view to withstanding any future scrutiny. It will be even more important to:

• consider pensions issues at an early stage and consider the impact of those issues on restructuring planning and timing, including ensuring that procedural requirements are complied with;
• identify and assess which entities in a corporate group have obligations to the pension scheme, where they support the employer covenant indirectly and how those will be affected by restructuring decisions involving group entities;
• have a carefully planned strategy for engaging with the trustees, Regulator and Pension Protection Fund, including detailed information sharing and consultation on proposed restructuring steps;
• consider what steps to take to mitigate the impact of restructuring plans on their pension scheme and, where appropriate, negotiate those steps with the pensions stakeholders;
• consider whether Regulator clearance may be desirable and practicable; and
• have proper and recorded governance and reasoning around all decisions/steps, including documenting the analysis of the impact on the pension scheme and the consideration of any appropriate mitigation for the pension scheme.

These steps will reduce the risk of any future investigation being instigated and put corporate groups and directors in the best position possible to defend any potential criminal or civil action.