It’s official: as widely trailed since the Pension Schemes Act 2021 (the Act) gained Royal Assent on 11 February 2021, the new criminal offences and provisions to widen the Pensions Regulator’s moral hazard powers will come into effect as expected on 1 October 2021.
As we have discussed in our previous blog posts, the Act introduces a number of measures which will have a significant impact for corporate and restructuring activity involving a company which operates a UK defined benefit pension scheme. These include:
- New potential for criminal liability. Two new criminal offences of ‘risking accrued scheme benefits’ and ‘avoidance of employer debt’ will be introduced by the Act, each carrying a maximum penalty of unlimited fines and/or seven years in prison. Alternatively, the Pensions Regulator (the Regulator) will have powers to issue civil financial penalties of up to £1m in similar circumstances.
- Wider potential for civil liability. The Act adds two new grounds, the ‘employer insolvency test’ and the ‘employer resources test’, to 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 under its ‘moral hazard’ powers.
- New procedural requirements. In addition, the Act will introduce new procedural requirements for certain corporate events, including mandatory notifications to the Regulator and the preparation of impact statements (known as ‘accompanying statements’) which may impact timing for corporate activity and give trustees and the Regulator greater and earlier leverage. Failure to comply will risk civil financial penalties of up to £1m. These procedural requirements will be bolstered by new investigation powers for the Regulator, including a power to require any person to attend for interview and a power to inspect records at parties’ premises, plus penalties for providing misleading information to trustees and the Regulator.
For further details of the impact of the Act on corporate and restructuring activity, see our briefings here (non-distressed corporate activity) and here (distressed corporate activity / restructuring).
Many of the provisions in the Act require secondary legislation in the form of regulations in order to be brought into force, as well as further guidance from the Regulator. Last week, the Pension Schemes Act (Commencement No. 3 and Transitional and Saving Provisions) Regulations 2021 (the Regulations) were made to bring into force certain provisions of the Act.
The Regulations confirm that key provisions of the Act including those relating to the new criminal offences, the widening of the Regulator’s powers to issue contribution notices and the new investigation powers mentioned above will come into force on 1 October 2021 as expected. The Regulations also contain transitional provisions which set out how certain provisions of the Act apply where the relevant act, failure to act or course of conduct in question occurred before 1 October 2021.
Further secondary legislation and guidance from the Regulator is still awaited in a number of key areas:
- Criminal offences. Following the issuance of draft guidance for consultation in March 2021, we are expecting finalised guidance from the Regulator on how it expects to use the new criminal offences before they come into force on 1 October 2021. Hopefully the finalised guidance will address some of the concerns raised during the consultation (see our blog post here (non-distressed companies) and here (distressed companies) for further details).
- Widened moral hazard. Following a draft issued for consultation in March 2021, we are awaiting an updated code of practice on how the Regulator expects to use its widened moral hazard powers. Again, hopefully that finalised code of practice will address some of the concerns raised during the consultation (see our blog post here for further details). In the absence of further clarity, employers and connected third parties may need to consider applying for clearance from the Regulator more frequently, although an updated clearance policy is also expected in due course and a draft has not yet been published by the Regulator.
- Procedural requirements. The Regulations bring into force the extension of the Regulator’s information-gathering powers and introduce penalties for non-compliance and for providing false or misleading information with effect from 1 October. Crucially, however, the Regulations do not bring into force the extended notifiable events obligations and obligations to prepare accompanying statements for employers from 1 October 2021. A consultation on draft regulations on the new notifiable events regime and the requirement to provide the Regulator and trustees with accompanying statements is expected later this year, with the new requirements expected to come into force in 2022.
For more information, please speak to the authors of this post or your usual Freshfields contact.