Clause for concern?
11th March, 2020
“Clause 107” – should trustees (and sponsors/others) be concerned?
Clause 107 of the Pension Schemes Bill 2019/2020. Seems innocuous enough so why is a joint industry forum using headlines about it normally reserved for outraged comments by certain newspapers about, well, anything! Under the new measures, trustees and their advisers could be “criminalised for doing the right thing” and be left “fearful of acting” they cry. Strong stuff, so what has gotten this joint industry forum, representing eight leading pension trade bodies, so outraged about little Clause 107 that they have written in these terms to the government. Well, what they are doing is highlighting serious concerns over criminal offences introduced by Clause 107. I shall expand ….
So, what is all the fuss about?
The measures introduced by the Pension Schemes Bill provide new powers to The Pensions Regulator following high profile failures such as Carillion and BHS and their impact on pension scheme members promised pension benefits.
So, with that in mind the government proposed that two new criminal offences are created via Clause 107.
Avoidance of employer debt
A person commits an offence only if— (a) the person does an act or engages in a course of conduct that— (i) prevents the recovery of the whole or any part of a debt which is due from the employer in relation to the scheme under section 75 of the Pensions Act 1995 (deficiencies in the scheme assets), (ii) prevents such a debt becoming due, (iii) compromises or otherwise settles such a debt, or (iv) reduces the amount of such a debt which would otherwise become due, (b) the person intended the act or course of conduct to have such an effect, and (c) the person did not have a reasonable excuse for doing the act or engaging in the course of conduct.
Risking accrued benefits
A person commits an offence only if— (a) the person does an act or engages in a course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits being received (whether the benefits are to be received as benefits under the scheme or otherwise), (b) the person knew or ought to have known that the act or course of conduct would have that effect, and (c) the person did not have a reasonable excuse for doing the act or engaging in the course of conduct.
The offences can result in up to 7 years imprisonment and / or a fine (unlimited, except in Scotland where it is limited to the statutory maximum) and / or a new civil penalty up to a maximum of £1million.
These are bad things so maybe this is a proportionate response I may hear some of you say. Indeed, but both offences apply very broadly to “persons” (not just sponsoring employers or trustees) with no requirement for association with the pension scheme. Herein lies a problem. Yes, the intention is that the measures are there to catch wilful and reckless behaviour but the problem is that their potential ambit is wider, much wider, than just the reckless.
The criminal offences, as currently drafted, could impact ordinary pensions and business activity and, in distress situations, they may act as a disincentive to our current rescue culture; for example, by encouraging directors to file for insolvency to avoid the risk of criminal liability that might arise through seeking a turnaround plan or a pension scheme compromise.
So far, attempts at making the measures clearer and more targeted have not succeeded. Regulator guidance on how the new powers will be used has been promised, but regulatory guidance has no special status in law and The Pensions Regulator is not the only possible prosecutor of the clause 107 offences. If ever there was a Clause that lent itself to the law of unintended consequences …
Should trustees and sponsors (and others) be concerned?
The short answer is ‘yes’. At very least, pension scheme trustees, sponsors and service providers need to keep a watching brief on the Pension Schemes Bill as it makes its way through Parliament, with particular focus on debates around and proposed changes to Clause 107. We are pretty certain it will generate some interesting debate!
Clarification of the nature of the offences and defences in guidance is useful. However, all of those potentially in scope of Clause 107 would, I am sure, prefer for clarity to be in legislation or even a formal Code rather than just guidance.