It’s Yorkshire Day on 1 August and, when I was thinking about this blog, the stereotype of a stingy Yorkshireman came to mind. Not because I think Yorkshire folk are actually stingy. I don’t! I was wondering whether TPR’s powers granted under the Pension Schemes Act 2021 (PSA 21) have made a difference, or whether the government was too stingy with the extra powers that it handed to TPR.

You know the history – in 2018, the government published a White Paper on protecting defined benefit (DB) pensions. This was in response to various high profile audit failures and collapsed businesses. The Work and Pensions Committee, and the late Frank Field, in particular, didn’t think too much of the £1 million financial penalty brought in by the PSA 21.  £1 million just wasn’t enough!

“The accountancy profession must have been in charge of drafting this section of the paper, as it appears they have misplaced a decimal point. The likes of Sir Philip Green need to be fined a billion, not a million, if the Regulator is to have a deterrent effect.” Frank Field

I love this quotation. It sums up the attitude of the Work and Pensions Committee (WPC), and Frank Field in particular, to the havoc that is capable of being wreaked on a person’s pension savings by irresponsible and/or badly thought-out corporate transactions and restructures, and by inadequate audits of companies. The WPC, quite rightly, wanted TPR to be able to more easily hold to account those responsible for taking reckless decisions. The WPC called for “nuclear deterrent” level fines of up to 3 times the amount of a contribution notice which, as we know, can represent the full deficit in a DB pension scheme and which, at the time, would have been a significant amount for many companies. The WPC said that this would “focus boardroom minds” at the point at which decisions affecting the funding of pension schemes are taken.

Back in 2019, Pensions partner, Catherine McKenna, blogged that only time would tell whether the new financial penalty of up to £1 million would be a sufficient deterrent.

Five years on, has TPR had reason to use its enhanced powers? Were the measures contained in the PSA 21 sufficient to act as a deterrent?  I take a look at whether the following measures have made a difference.

• The additional tests in relation to contribution notices (the “employer insolvency” test and the “employer resources” test)
• The criminal offences of “avoidance of employer debt” and “conduct risking accrued scheme benefits”
• The civil penalties of up to £1 million (section 88A powers).

First though, a quick recap of these measures.

Contribution notice tests

The two additional contribution notice tests sit alongside the material detriment test. They make it easier for TPR to take action. TPR is able to look at a snapshot in time and the impact on the employer, rather than being required to predict the likely impact of an event on the future funding levels of a DB scheme.

New criminal offences

The offence of avoidance of an employer debt includes any act or failure to act intended to prevent the recovery of the whole or any part of a section 75 debt. This includes preventing such a debt from becoming due, compromising the amount of the debt or reducing the amount of a debt that would otherwise become due.

The offence of conduct risking accrued scheme benefits includes any act or failure to act that detrimentally affects in a material way the likelihood of accrued scheme benefits being received. This applies where the person knew or ought to have known that such a course of action would be likely to have that effect.

The key points to note about these two offences are that:

• Almost anybody can be caught by these offences. There is no requirement to be “connected” or “associated” with a scheme employer in the same way that there is for contribution notices.
• In relation to the offence of conduct risking accrued scheme benefits, it is not necessary for there to have been any intention to risk accrued scheme benefits, the person just had to know, or ought to have known, that the action they took would have had the prohibited result.
• Both offences carry the risk of a criminal penalty of an unlimited fine and/or imprisonment of up to seven years. Alternatively, TPR could use its financial penalties powers and levy a penalty of up to £1 million (see below).

It is worth noting that failure to comply with a contribution notice can also be treated by TPR as a criminal offence, carrying an unlimited fine.

New financial penalties

Certain actions are now capable of attracting a financial penalty of up to £1 million. As well as the offences of avoidance of employer debt and conduct risking accrued scheme benefits mentioned above, actions that are capable of attracting the higher financial penalties include providing false or misleading information to TPR or pension scheme trustees, failure to comply with a contribution notice, and failure to comply with the notifiable events regime.

What about the notifiable events regime?

The PSA 21 provided the framework for expanding the notifiable events regime for certain types of transactions, such as where there is the sale of a material proportion of the business or assets of a scheme employer, the granting of priority security on a debt, and the sale of a controlling interest in a sponsoring employer (which is already an existing notifiable event). Under the framework, both TPR and the pension trustees would need to be notified of certain types of transactions in advance of completion. Draft regulations were published in September 2021 to provide the detail for the framework, but the regulations were never finalised. The exact timing of the notifications possibly ended up on the too difficult pile, with many commentators concerned that the advance notification requirement might result in delays to transactions, particularly time critical transactions such as insolvency pre-packs.

There is still no definitive timetable for introducing the enhanced notifiable events regime, although the last government did confirm that the changes to the regime were on the backburner rather than shelved completely, with the DWP wanting to “evaluate all options before deciding on the best course of action including any potential future legislative change”.

Industry concerns with TPR’s new powers

Following publication of the White Paper on protecting defined benefit pensions, pensions and insolvency professionals were nervous about the reach of the proposed amendments, and whether they would unduly inhibit market activity and the ability of a scheme employer to restructure where appropriate. One lawyer even speculated that if a court judge were to approve a restructuring plan under new insolvency legislation, and that restructuring plan were to reduce the amount payable to a DB scheme, could TPR prosecute the judge for the offence of “conduct risking accrued scheme benefits”? It seems a bit far-fetched, but it is a good illustration of the potential reach of TPR’s enhanced powers.  Of course, as an executive non-departmental public body, TPR is expected to act reasonably and proportionately, so hauling a high court judge over the coals is unlikely to have been at the top of TPR’s list of priorities.

Where are we now?

We don’t (yet) have the enhanced notifiable events regime, to act as an early warning system for TPR and pension trustees, but are TPR’s other PSA 21 powers sufficient?

In a freedom of information request, TPR confirmed that it has not yet used the new contribution notice tests, nor has it prosecuted the new criminal offences of avoidance of employer debt or conduct risking accrued scheme benefits, nor has it applied the new financial penalties of up to £1 million under section 88A of the Pensions Act 2004 (inserted by PSA 21).

Does this mean that there have been no companies engaging in harmful behaviour, or that TPR has missed an opportunity?  Probably not. It is more likely that the new powers have, in fact acted as a deterrent, and/or provided leverage for TPR when negotiating with scheme employers.

TPR has said that “Even though we have not had occasion to use the powers listed at 1 and 2 above [relating to new contribution notice tests and criminal offences], which would only apply to acts occurring after October 2021, we have seen evidence that the powers’ existence influences behaviour in the market in the ways intended.

In respect of the new section 88A powers, to date we consider that the threat of these powers are providing the necessary deterrent to ensure compliance with our information gathering requests.”

Good news all round?

While the impact of the change to the notifiable events regime, if it ever happens, is as yet an unknown quantity, responsible scheme employers do not appear to have been adversely impacted by TPR’s enhanced powers in a way that they had first feared when the government published the White Paper. Meanwhile, according to TPR, the new powers have indeed strengthened TPR’s ability to act as an effective regulator. Not so stingy, then, after all.

For more information on TPR’s enhanced powers under the PSA 21, please see our #how2dopensions quick guide.