UK Pensions: will a new government potentially criminalise legitimate corporate activity?

With the general election taking place in less than two weeks’ time, the Conservative Party’s manifesto confirmed last week that, if elected, it would reintroduce the same “Pension Schemes Bill” into Parliament, which it laid shortly prior to Parliament being dissolved. As a result, it may not be long before a wide range of ordinary corporate activity could, in certain circumstances, be a criminal offence where a group operates a defined benefit pension scheme. This includes paying dividends, reorganising a corporate group, or granting security to a lender.

Although the other parties’ manifestos were not so explicit, the bill had cross-party support when it was first laid before Parliament. We are therefore expecting the bill to be revived in a very similar form to that published in October regardless of the political party (or parties) that forms a government.

The bill would introduce two new criminal offences carrying a maximum penalty of seven years in prison where any person:

• engages in an act or conduct that they knew or ought to have known would have a “materially detrimental effect” on a defined benefit pension scheme; or
• commits an act that prevents the recovery of employer debt due to a defined benefit pension scheme or otherwise compromises or settles such a debt (including by means of arrangements permitted under pensions law).

The pensions industry was expecting a pensions bill to reflect proposals consulted on by the government over the last few years following the insolvencies of BHS and Carillion. But the way the offences were framed in the bill was much broader than expected:

• The offences are much wider than the single offence of “wilful or reckless” behaviour in relation to a pension scheme proposed in the government's consultation paper issued in June 2018 (see our briefing: Pensions Regulator to have stronger powers in corporate transactions) which was meant to tackle “irresponsible activities” and reckless behaviour.
• The consultation also proposed that the offence was intended to target parties connected to the scheme’s sponsoring employer, such as directors. The offences set out in the bill could apply to acts of third parties, including banks, investors, commercial counterparties, pension scheme trustees and professional advisers, even though there is no legal connection with the pension scheme.

No offence will be committed unless there is no “reasonable excuse” for the conduct, but the bill includes no details on how the “reasonable excuse” requirement would operate. Obtaining clearance from the Pensions Regulator for an act or course of conduct could be useful evidence to defend a prosecution, but would not itself be a defence. Whilst the “no reasonable excuse” requirement may seem wide, it remains to be seen whether directors and others will really find that sufficiently comforting when there is potential criminal liability.

The wide ambit of the proposed new criminal offences is likely to make ordinary corporate activity much more difficult for groups which operate defined benefit pension schemes, which may inadvertently cause more harm than good for pension schemes by damaging the companies that they rely on for support. A particularly acute example is that it would impact distressed companies by disincentivising the current “rescue culture” by making it more likely that directors will file for insolvency rather than risk personal criminal liability by pursuing a turnaround plan or pension scheme compromise. Surely this can’t have been the government’s policy intention?

We await the revival of the bill with interest.