The Pension Schemes Act 2021, which comes into force on 1 October 2021, will introduce new criminal offences and financial penalties, and two new contribution notice triggers, where a company or group has a defined benefit occupational pension scheme (DB scheme). The government is also consulting on extending the pensions notification requirements.
Criminal offences and sanctions
The new criminal offences and civil sanctions are widely drawn and could apply to company directors, lenders, investors, sellers, purchasers, trustees and advisers who take action which, broadly speaking, is materially detrimental to a DB scheme, where they do not have a reasonable excuse for their actions.
- Criminal offences – In broad terms, it will be a criminal offence to take action which avoids a “section 75” employer debt to a DB scheme, cause a material detriment to a DB scheme or fail to comply with a contribution notice. The sanctions for these offences include up to seven years imprisonment, an unlimited fine or both. In practice, these offences could apply in a wide range of circumstances including where:
- a company takes on new security which ranks ahead of a DB scheme;
- a profitable part of a business or its assets are sold; or
- a dividend is paid to shareholders when a business is in distress.
- Fines of up to £1 million – A civil penalty of up to £1 million could be imposed on directors and other parties in a range of circumstances, including where a person:
- takes steps to avoid or reduce the amount of a “section 75” employer debt (for example, as a result of the sale of a group company), where it was not reasonable for the person to act in the way that they did; or
- takes steps that are materially detrimental to the prospect of benefits being paid under a DB scheme, where it was not reasonable for the person to act in the way that they did.
- New contribution notice triggers – There are two new trigger events under the Act. They will allow the Pensions Regulator to issue a contribution notice in respect of: actions that materially reduce the amount of employer debt likely to be recovered by a DB scheme on hypothetical insolvency (where the scheme has a deficit on a buy-out basis); or actions that reduce the value of the resources of a DB scheme’s sponsoring employer to a material extent. These trigger events could include:
- a company taking on additional debt which ranks above a DB scheme in the event of the company’s insolvency;
- a corporate restructuring;
- the sale of a valuable part of a business; or
- the payment of excessive dividends.
Proposed changes to notification requirements
Under draft regulations, which are expected to come into force on 6 April 2022, a notification obligation would be triggered if there is a “decision in principle” by an employer with a DB scheme:
- to sell a material part of the business or assets; or
- to grant security which will rank ahead of the DB scheme.
The existing notifiable event relating to the relinquishing of control of a DB scheme employer is also being amended to bring forward the timing of the relevant notification so that, in future, it would arise when: there is a decision in principle by a controlling company to relinquish control of the employer company, or an offer to acquire control of the employer company, where the employer company has not made a decision in principle to relinquish such control. Failure to comply with these requirements could result in a fine of up to £1 million.
For further information, see our blog post here.