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Freshfields Transactions

| 10 minutes read

Draft UK Pensions Regulator guidance on new criminal offences: impact for restructurings

The Pensions Regulator (TPR) recently issued its draft guidance on its approach to investigating and prosecuting the new criminal offences under the Pension Schemes Act 2021. In this blog post, we share our thoughts on the level of comfort that might be gleaned in relation to criminal risk if the draft guidance were finalised in its current form, focusing on the particular concerns that would remain for restructuring activity.


The Pension Schemes Act 2021 will introduce wide new criminal offences that will impact corporate activity involving groups with UK defined benefit pension schemes. Our latest blog and briefing on this topic can be found here. The two key criminal offences apply where any person acts in a way that:

  • intentionally avoids an employer debt to the scheme ('avoidance of employer debt'), or
  • they knew or ought to have known would have a materially detrimental impact on the security of scheme benefits ('risking accrued scheme benefits'),

in each case without having a reasonable excuse.

Both offences are punishable by up to seven years in prison and/or an unlimited fine.

A wide range of restructuring activity could potentially fall within the scope of the criminal offences, including asset/business sales, financing and refinancing (including bridge financing), granting security, lender actions (including loan to own and sale of debt) and decisions to continue trading (or to file).

Further, any person can be liable, including corporates, directors, lenders, commercial counterparties and advisers.   

In response to concerns raised by the pensions and restructuring industries about the breadth of the offences and the potential impact for scheme employers, the government indicated that TPR would provide guidance on its approach to investigating and prosecuting the new criminal offences. On 11 March 2021, TPR issued its draft guidance for consultation, with the consultation period closing on 22 April 2021.

Key points on the draft guidance

In preparing the draft guidance, TPR has clearly tried to take on board the concerns raised by industry and sought to frame the guidance in a way that will provide some degree of comfort. In particular, the draft guidance confirms that:

  • TPR’s understanding of the new legislation is that it is not intended to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour. Rather, the powers are aimed at giving TPR a stronger range of options to address the more serious intentional or reckless conduct that was already within the scope of its existing civil 'moral hazard' powers.
  • TPR would not 'usually' expect to prosecute someone who would be able to establish a statutory defence under the current 'moral hazard' powers.
  • TPR recognises that a person’s actions and knowledge should not be assessed with the benefit of hindsight, but rather be based on the circumstances at the time (although, in practice, it may be very difficult for TPR to completely ignore the impact of hindsight when deciding whether to prosecute).
  • While whether there will be a reasonable excuse in any circumstances will be fact-specific, TPR has identified three key factors that it considers will be significant (see below) to try and provide some clarity.
  • TPR’s view is that advisors are unlikely to be in scope of the criminal powers where they are acting in accordance with their professional duties.
  • When investigating whether to use its powers, TPR will expect assertions made by parties (for example, as to whether they ought to have known there would be material detriment, whether they would have a 'moral hazard' statutory defence or whether they had a reasonable excuse) to be evidenced by contemporaneous records. This will mean that the process for considering and addressing the impact of corporate activity on the pension scheme, and ensuring those actions are appropriately recorded will be crucial.

TPR also states in the draft guidance that conduct is more likely to be prosecuted where:

  • the primary purpose of the conduct is the 'abandonment' of the scheme without provision of 'appropriate' mitigation;
  • significant financial gains have been 'unreasonably' made to the detriment of the scheme;
  • there has been some other 'unfairness' in the treatment of the scheme; and/or
  • the trustees, TPR and/or the PPF have been misled or not appropriately informed.

Unfortunately, TPR’s approach under the current 'moral hazard' regime has demonstrated that many of these concepts are inherently vague and subjective – so could result in the criminal investigation of good faith commercial decisions. Uncertainty and resulting nervousness around this may risk decisions being taken that damage, rather than protect, the sponsoring employers of pension schemes – to the detriment of all stakeholders, including employees, commercial counterparties and the pension scheme.

More detail on 'reasonable excuse' – and some concerns from a restructuring perspective

The draft guidance states that TPR considers that there are three factors that will be significant for deciding whether a person has a reasonable excuse for an act or failure to act:

1. Where the detrimental impact was an incidental consequence of the act or omission, as opposed to a fundamentally necessary step to achieve the person’s purpose, the person is more likely to have a reasonable excuse. 

Examples are given of arm’s-length business activity with third parties, such as lenders deciding to refuse credit or revising or terminating a lending arrangement. While this is helpful, there is an important caveat here, which is that TPR expects the purpose of the act to be 'unrelated to the pension scheme'. This introduces an unhelpful grey area – for example, a lender may not wish to continue lending because of the risk associated with the employer’s liabilities to the scheme.

2. The adequacy of any mitigation provided to offset the detrimental impact will contribute to a person having reasonable excuse. 

Examples are given of the impact of corporate activity being fully addressed by amending the terms of the activity to remove the detriment to the scheme or providing alternative covenant support to the scheme.

This limb is less helpful. Although TPR only says that full mitigation is 'more likely' to give a person a 'reasonable excuse', in practice, if mitigation fully offsets any detrimental impact it is difficult to see that this is an aspect of 'reasonable excuse' at all – rather there is no relevant act to which criminal liability could attach. Further, the question of adequacy of mitigation is inherently vague and subjective, as illustrated by TPR’s express expectation that mitigation will only be adequate where the scheme is treated 'fairly in relation to other parties' rather than where the actual detriment caused is addressed. Finally, in a distress scenario, it may not be possible to fully mitigate any potential detriment.

3. Where no, or inadequate, mitigation was provided, there is less likely to be a reasonable excuse where there was a viable alternative that would have avoided or reduced the detrimental impact. 

Again, this is couched with an expectation that the scheme will be treated 'fairly', without necessarily recognising the very different circumstances of different parties. There is an express recognition that TPR won’t 'generally' expect someone to pursue an alternative that means unreasonably disregarding their own interests – such as a lender declining to lend additional funds where it reasonably considers there to be a high risk of default or that it will recover more of its existing lending by default now than extending lending terms further. However, a key concern will be the extent to which TPR will expect alternatives to be explored and what view it takes on viability and the reasonableness of a lender’s decisions. Will TPR generally accept the commercial judgments made by parties in good faith on those issues or will it seek to impose its own view?

TPR also notes some additional factors that it says may have a bearing on whether to begin a criminal investigation, including the extent of communication and consultation with the trustees and TPR. While the draft guidance states that these are unlikely to be determinative alone, in practice it is difficult to see how a criminal prosecution could be brought that second-guessed the conclusions reached by parties as to material detriment or reasonable excuse where there has been full, honest and open consultation with the trustees/TPR and steps have been taken that fully address any concerns

The position of the specialist distress lenders

From a restructuring perspective, a key area of concern in the draft TPR guidance is its failure to give comfort on the position of specialist distress lenders, particularly when coupled with an understanding of TPR’s approach in such circumstances as indicated by its recent regulatory intervention report in relation to Silentnight (see below).

This could have two significant implications, both of which could make it more likely that businesses become distressed and cannot be rescued (to the detriment of a wide range of stakeholders):

  1. specialist distress lenders may be reluctant to lend to, or acquire debt owed by, groups with UK defined benefit pension schemes, making business rescues less likely; and
  2. as a result, non-distress lenders may be more reluctant to lend to groups with UK defined benefit pension schemes because their options to exit in a distress scenario may be more limited.


In its recent regulatory intervention report in relation to Silentnight, TPR gave a flavour of the actions it considered HIG had taken as purchaser of Silentnight’s debt that were materially detrimental to the pension scheme and hence it considered brought HIG within the remit of its existing 'moral hazard' powers. The Silentnight case settled without any admission of liability by HIG, so it is impossible to know whether TPR’s action would have ultimately been successful. However, coupled with the draft guidance, the report does give insight into when TPR might investigate using its criminal powers in future against a purchaser of distressed debt on the grounds that they were 'risking accrued scheme benefits'. For example, TPR may consider such investigations if it considers that the purchaser had inappropriately used its powers to bring about the 'unnecessary' insolvency of the pension scheme employer with the intention of buying the employer’s business without the scheme. 

Generally, to reduce the risk of assertions being made, all parties involved in a pre-pack should ensure that:

  • decisions are taken, and processes run, by the company’s management supported by appropriate advice; and
  • TPR and the PPF are consulted in relation to contingency planning and any pre-pack so that they can see that proper processes are followed and any viable alternatives to insolvency are appropriately pursued.

However, this may not assist if TPR takes a different view on the viability of alternative options based on its own view as to what terms lenders should reasonably accept and using its view of fairness to the pension scheme as a benchmark. In this light, TPR’s view of certain actions in the Silentnight case are concerning. In particular:

  • The Silentnight report implies that TPR takes the view that the mere fact that a purchaser of distressed debt may acquire a business pursuant to a loan to own strategy could be inappropriate. Provided such a strategy does not result in sale of assets at an undervalue or an unnecessary insolvency, it is difficult to see why this would be the case. However, that will be of limited comfort if lenders are concerned that TPR may be inclined to consider criminal investigations as a matter of course where there is a loan to own strategy. We do not think that this is TPR’s intention, so more clarity would be welcome.
  • TPR seems to consider that it will not always be appropriate for the purchaser of distressed debt to enforce the contractual rights attached to that debt in the same way as the original lender could have done. In particular, TPR seems to consider that the fact that the purchaser will have paid a reduced price for the debt (reflecting the risk it takes that it might not ultimately make full recovery) makes it inappropriate for the purchaser to then claim the full value of those rights from the company. In essence, TPR seems to object to the purchaser of the distressed debt making a profit – with that being viewed as unfair to the pension scheme. Under the TPR’s draft guidance on the use of its criminal powers, that would in turn influence TPR’s view on whether the purchaser had 'reasonable excuse' for the actions that it takes in enforcing those rights (and not, say, waiving them). 

Further limitations of the draft guidance

While the draft guidance is helpful, a number of areas of concern remain in addition to those flagged above in relation to TPR’s view of 'reasonable excuse':

  • The guidance has no statutory effect and will not bind TPR to act in a particular way. In addition, the wording of the guidance is deliberately (and sometimes quite painfully) couched so that it is not definitive on any issue. This gives TPR a wide discretion in making a decision to prosecute. Where conduct is the subject of significant public outcry, TPR may choose to make use of the flexibility in the guidance to adopt a more expansive approach to prosecution.
  • TPR expressly notes that the draft guidance represents TPR’s view alone and that the other potential prosecutors of the criminal offences (eg the Secretary of State or the Director of Public Prosecutions) may take a different approach. It would provide considerably more certainty if all potential prosecutors confirmed that the same principles would be applied.
  • Stating that the criminal offences are only likely to be pursued where actions would fall within the current 'moral hazard' regime is of limited comfort when there has been only limited testing of that regime in the courts, TPR itself takes a wide view of what actions are caught and has demonstrated that it can assert that there may be a case in a wide range of circumstances.
  • There is no clearance regime specifically for the new criminal offences and TPR does not provide any comfort that parties obtaining 'moral hazard' clearance are also likely to be considered to have 'reasonable excuse' for the purposes of the criminal regime.
  • The guidance is very focused on the 'risking accrued scheme benefits' criminal offence (ie where actions cause material detriment). Very little is included in the draft guidance about how TPR will approach the 'avoidance of employer debt' criminal offence, bearing in mind that this encompasses compromises and restructuring of pension liabilities. However, it does indicate that a court-approved restructuring plan under the Corporate Insolvency and Governance Act 2020 is likely to amount to 'reasonable excuse' which could result in an increase of in-court restructurings if they are perceived to carry less risk than out-of-court alternatives.

Hopefully feedback from the consultation will help TPR to refine the draft guidance to provide additional comfort and further reduce the risk that, rather than protecting pension schemes, the new criminal offences worsen their position by making it harder for their sponsoring employers to do business and/or to be rescued if they become distressed.

If you would like to discuss any issues relating to the Pension Schemes Act 2021 or have any issues that you would like us to consider for our response to the consultation, please do get in touch with your usual Freshfields contact or any of the authors.


restructuring and insolvency, pensions, europe