Protecting Pension Schemes by Alex Stein

On the 19th March 2018 the Department of Work and Pensions released a new policy paper in relation to the Protection of Defined Benefit Pension Schemes. Although the Government is anxious to emphasise that there are no systemic problems with the regulatory and legislative framework governing DB Schemes, the white paper proposes a significant strengthening of the Pensions Regulator’s powers following a number of recent high profile cases including BHS and Carillion. This is an important area of public policy with over 10 million employees in DB schemes in the UK and over £1.5 trillion being managed.

The Government is hoping to significantly improve the Pensions Regulator’s ability to act quickly and decisively and to strengthening the deterrent against irresponsible employers who put their pension schemes at risk.

The Regulator’s main power against companies and individuals who fail to protect a DB scheme is a contribution notice requiring a payment into the scheme- in February a notice of £10 million was made against Dominic Chappell in relation to the BHS DB schemes. In order for a contribution notice to be made the Regulator must present its evidence to the Determinations Panel and the white papers sets out details of greater information gathering powers.

The Regulator currently uses section 72 Pensions Act 2004 to compel information from employers and individuals. The Government is proposing to allow the Regulator to inspect companies- both on notice and without notice and to require individuals to attend and answer questions at interview. Of relevance to professionals, the white paper indicates that the power to compel answers in interview will provide protection for advisors and others who are willing to assist the Regulator but cannot unless compelled by statute due to client confidentiality issues.

A failure to comply with a s72 notice is a summary criminal offence but the government is concerned that bringing prosecutions is too time consuming and costly and, in some cases, disproportionate. It is proposing extending the Regulator’s power to issue fixed and escalating penalties for a failure to comply with a section 72 notice to DB schemes – a civil sanction currently available to the Regulator in automatic enrolment cases.

The Government is also seeking to strengthen the deterrent element of the Regulator’s function. In addition to the contribution notice [which effectively requires a repayment of misappropriated funds] the white paper proposes an express power to penalise the targets of a contribution notice with a fine. The penalty would be linked to the scale of the contribution notice and could possibly therefore be highly punitive. Also of interest is the Government’s expressed desire to examine the feasibility of applying this punitive power to acts prior to enactment. This might be difficult to square with Article 7 of the European Convention but is clearly aimed at those who have recently been before the Work and Pensions Committee.

A new criminal offence to punish wilful or grossly reckless behaviour of directors and other individuals in relation to DB schemes is proposed and will allow the Regulator to bring forward prosecutions for significant corporate wrong doing for the first time. At present the Regulator passes information to other law enforcement agencies such as the FCA and the SFO but it is hoped that this new offence will lead to clearer, quicker and tougher regulation of the DB sector. The white paper does not detail the penalty envisaged under the offence although it is likely to match the 10 year maximum under the Fraud Act 2006.

The white paper also sets out provisions to improve the efficiency of information sharing between the Regulator and the Insolvency Service so that those guilty of mismanagement or systemic avoidance can be disqualified from acting as directors as soon as possible.

Writing in the Politics Home website on 18th March 2018 the secretary of state for work and pensions, Esther McVey said:

We will not stand for employers evading their responsibilities and relying on the protection that the system offers whilst others who do play by the rules, have to foot the bill. Neither will we stand for company directors balancing the books at the expense of long serving employees’ retirement funds.’

No doubt sentiments which would be broadly welcomed by the electorate following the recent collapse of Carillion. Whether the Government has the political time and energy to enact the provisions whilst dealing with Brexit remains to be seen.

Alex Stein is a member of the 2 Bedford Row Financial Crime Group.

The white paper can be found here.


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