Blog Business Crime & Financial Services 2nd Mar 2021

Insolvencies, Pensions and Prosecutions

The Pension Schemes Act 2021 (PSA) received Royal Assent on 11 February 2021, after a long journey through Parliament. It began with a White Paper and then consultation paper in 2018, both of which advertised a stated aim of the enacting of a new criminal offence for company directors whose actions place a pension scheme at risk.

The PSA true to that aim now amends the Pensions Act 2004 and will place companies their directors and associated persons under greater scrutiny in their dealings with benefit pension schemes. It is no doubt driven in part by Government efforts to try to reduce the number of times that the Pension Protection Fund is called upon to bail out insolvent companies.

Recent examples show how, when insolvency befalls a company or group, decisions that have been taken – and may have been taken in good faith – about defined pension schemes (and liability to them) are often the subject of very public and fierce criticism. The collapse of Carillion led to significant problems with the defined benefit pension scheme and brought into sharp focus anxieties of pension scheme members rightly concerned about what would happen to their retirement benefits. In the retail sector Arcadia’s collapse placed 10,000 of its employees in a similar state of uncertainty about their pension benefits, and whether their employer would make good on any deficit.

The PSA introduces – in addition to new investigatory powers for the Regulator and new procedural requirements for companies – new criminal offences with substantial penalties on conviction. These provisions will be brought into force by yet to be published regulations (pursuant to s131) but are advertised as coming into force this Autumn – before which time further guidance as to both the civil scheme and the criminal offences will be published.

The reach of the PSA will affect individuals beyond those with direct and immediate control of the decisions taken about pension schemes. Trustees and company directors will of course be exposed to the risk of prosecution, sometimes for events that took place many years before a crisis event or insolvency, but the drafting of the offences allows for the possibility of an indictment against professional advisers, banks and partners / counterparties to the company in commercial transactions. The 2018 consultation foretold as much with the range of possible targets for the new legislation described as “directors, sponsoring employees and any associated or connected persons and in some circumstances, trustees:

The PSA introduces two key new criminal offences, each of which carry – on conviction – a maximum penalty of or seven years imprisonment or an unlimited fine. Both sections apply in relation to occupational pension schemes. None of the criminal offences are to be retrospective.[1]

 S58A Avoidance of employer debt

Employer debt operates by virtue of s75 Pensions Act 1995 (as amended) and, in summary, requires participating employers when they withdraw from the Pensions Scheme. This debt is calculated on a ‘buy-out’ basis, which tests whether there would be sufficient assets in the Scheme to secure all the member benefits.

S107 of the Act inserts into the Pensions Act 2004 the new criminal offence of ‘avoidance of employer debt’. Here a person commits an offence where they:

  1. intentionally
  2. do an act [or by virtue of s58A (3) fail to act] or engage in a course of conduct which
    1. prevents the whole or any part of a debt which is due from the employer in relation to the scheme, or
    2. prevents the debt becoming due or
    3. compromises or otherwise settles such a debt or
    4. reduces the amount of such a debt which would otherwise have become due and
  3. do so without a reasonable excuse.

The drafting is broad enough to encompass ordinarily unremarkable commercial behaviour; such as preventing an employer debt from arising by carrying out a corporate rescue, restructuring, CVAs or implementing a restricting mechanism such as an apportionment arrangement (other than a regulated apportionment arrangement with the Pension Protection Fund although even this is not expressly out-with the drafting).  As such, trustees, corporates, directors and their financial advisers will have to consider anxiously how their actions may be viewed if a restructuring fails and the company collapses into administration and insolvency.

S58B Risking accrued scheme benefits’

S107 further inserts a criminal offence of ‘risking accrued scheme benefits’ . This imposes criminal liability where a person, again without reasonable excuse,

  1. does an act, fails to act or engages in a course of conduct that
  2. detrimentally affects in a material way
  3. the likelihood of accrued scheme benefits being received (whether the benefits are to be received as benefits under the scheme or otherwise).

The offence may be committed recklessly as well as intentionally, at its lowest all the mens rea that is required is that the person ought to have known that their act/failure to act/course of conduct would have a material and detrimental effect. It is unarguably a very broad test and its possible to see how a wide variety proposed corporate activity could be argued as being within the scope of s58B.

For example, there may be different views at board/director/adviser level as to how a company should measure its ability to meet its obligations to its employees in the pension scheme. What is the position, for instance, if the company decides to make significant investment in leasehold property (to expand its business) and as a result cash flow suffers? That decision might well detrimentally and materially affect the likelihood of an employer making good its promise to meet its pension obligations – affecting liquid assets and cash flow. In those circumstances one can see how the director who takes what might (in the current circumstances) be a brave step to expand their company could fall within the definitions of s58B if that expansion step fails to bear fruit. Their defence would no doubt fix on the issue of decisions taken in good faith and the defence under s58(b) of reasonable excuse.

The Pensions Regulator will be producing guidance on the use of the new criminal powers and it plans to undertake a consultation first to ensure these vital views are captured. That guidance should give greater clarity on the ambit of reasonable excuse, but is unlikely to be exhaustive. The safest, but labour intensive, solution may be to approach the Regulator using the clearance procedure already in place for those asking that civil powers not be used following a corporate transaction or scheme-related event, available to employers and connected or associated with them.


Leon Kazakos QC



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