In January 2020, we reported that the Pension Schemes Bill ('the Bill') had been reintroduced into Parliament by the UK government.
By way of reminder, the Bill includes a number of provisions that will significantly impact corporate activity involving groups with a UK defined benefit (DB) pension scheme. Most notably, it would introduce broad new criminal offences carrying a maximum penalty of seven years in prison, as well as widening the circumstances in which the Pensions Regulator (TPR) can make connected third parties liable for pension scheme deficits by issuing a ‘contribution notice’.
Significant concerns have been raised about the potential impact of the new offences and whether they might have the unintended consequence of damaging, rather than protecting, DB pension schemes by making it much more difficult for their sponsoring employers to manage their businesses effectively in the good times and rescue their businesses in harder times.
The Bill’s progress was paused following the House of Lords committee stage in March 2020 due to the COVID-19 pandemic, but on 30 June 2020 the report stage took place in the House of Lords.
We have set out below some highlights of the debate on the Bill at the report stage in the House of Lords in relation to the proposed new criminal offences. The key takeaway is that whilst concerns about the scope of the criminal offences were debated at length, no amendments were carried forwards that would alleviate those concerns.
Proposed narrowing of the scope of the criminal offences
The key amendment proposed during the report stage was an amendment that would have limited the scope of the criminal offences introduced by clause 107 of the Bill ('amendment 46'). Amendment 46 would crucially have amended the new offences of risking accrued scheme benefits and avoidance of employer debt so that rather than applying to any person, they would only apply to those connected to or associated with the pension scheme employer, and therefore be consistent with the scope of the existing contribution notice regime. However, the amendment was withdrawn as a result of the debate.
The risk of a chilling effect
In discussion of amendment 46, the members of the House of Lords focused on the potentially chilling effect that the new criminal offences might have on business. Comments were made that '[d]efined benefit scheme employers may well become untouchables as counterparties', 'the provisions under clause 107… could leave parties reluctant to deal with a business because of its pension scheme, which could in turn jeopardise the ongoing solvency of the company' and 'in distressed situations, they [the criminal offences] might act as a disincentive to corporate or business rescue.' These points emphasise a crucial one made in our earlier blog – the proposed new criminal offences may inadvertently make it harder for companies with DB pension schemes to do business, and harder to rescue them when they have difficulties.
Particular focus was drawn to the risks of criminal liability for landlords and lenders in business with DB scheme employer entities. Lenders may well be aware that enforcing a debt could result in material detriment to the pension scheme, but also have their own commercial interests to consider. Similarly, a landlord may decline to renew a lease or enforce early termination, but will know that this may have a knock on effect on the employer’s ability to support its DB pension scheme and so potentially fall within the scope of a criminal offence if it did not have reasonable excuse.
In the House of Lords, the government reiterated that the criminal offences are not intended to frustrate legitimate business activities conducted in good faith. The government also commented that 'the aim [of the new criminal offences] is to target individuals who intentionally or knowingly mishandle pension schemes or endanger workers’ pensions by behaviours such as chronic mismanagement of a business or avoiding pension liabilities'.
This seems to hark back to the government’s consultation paper in June 2018, which proposed a single offence of wilful or reckless behaviour meant to tackle 'irresponsible' employers. However, this is not what the wording of the Bill reflects and, despite the government’s seeming good intentions, the scope of the Bill’s criminal offences remains startling broad and could indeed capture good faith business activities.
Lack of definition of 'reasonable excuse'
Criticism was also levelled at the lack of clarity over what constitutes a 'reasonable excuse' and the decision to leave this guidance to TPR. The government declined to meaningfully engage with the point, but effectively suggested that a criminal court will know a reasonable excuse when it sees one.
The government did helpfully emphasise that the burden will be on the prosecuting authority/TPR to demonstrate that there is 'no reasonable excuse' in a particular case, which may give some limited comfort.
The role of TPR guidance
It is clear from previous discussion of the Bill that it is intended that TPR guidance will be relied upon to provide greater specificity in relation to the intended scope and focus of the criminal offences.
However, as commented in the report stage, potential defendants will ultimately be left with great uncertainty until cases come before the courts and precedents are set – which is deeply unhelpful for employers and others trying to operate their businesses in good faith and without the risk of criminal liability.
In our view, given the breadth of the criminal offences, it will be a huge challenge for TPR to produce guidance which clarifies and narrows the scope of these offences in a way which will provide real comfort to those who need it. Nonetheless, we await the publication of TPR’s guidance with interest.
Following the report stage, the Bill will return to the House of Lords for its third reading (though a date has not yet been scheduled), after which it will make its way through the House of Commons.