New pensions act offences have ‘far-reaching consequences’, LCP warns

Of particular concern, according to the consultancy, is a new “conduct risking accrued benefits” offence, which encompasses people who “knew or ought to have known” that their conduct could impact the scheme, rather than just those who have acted recklessly.

LCP argued that this brought what was once considered ordinary business activity into the scope of the law. The consultancy group cited examples such as a director signing off a large dividend without allocating some money for the pension scheme, or a finance team involved in a corporate restructure that moved assets away from the scheme.

Lenders requesting additional security when lending to a struggling company with a defined benefit scheme could also be penalised, and there was a risk of a £1m fine or even a custodial sentence where it is judged that scheme trustees’ actions (or inaction) reduced the likelihood of members receiving their benefits in full, LCP said.

The consultancy also highlighted the expanded power behind TPR’s contribution notices. Two new contribution notice tests will broaden the range of circumstances in which notices can be applied, with some previously normal business activities — for example, material restructuring or dividend decisions — potentially falling foul of the new standards.

All this will require the maintenance of a much clearer audit trail showing a process of “reasonable” decision-making by sponsors, schemes and trustees, including evidence and supporting analysis proving the scheme was properly considered.

Laura Amin, principal at LCP, said: “Directors and others will need to take action to ensure they avoid falling foul of the new TPR powers around contribution notices.

“Many will also be concerned about the threat of jail or a fine if they are unintentionally involved in something that is judged to have weakened a company’s support for the pension scheme.

“Responding to these new rules appropriately will be particularly challenging for those businesses that are struggling to recover from Covid-19, or are badly hit by Brexit.”

Ms Amin added that there were “lower thresholds” for criminal offences than had previously been proposed, meaning a wider range of people “could be liable for actions taken unwittingly”.

“Alongside this there is the need for extra governance and documentation to demonstrate that all parties have acted reasonably vis-à-vis the pension scheme in making material business decisions,” she said.

“The expectations of shareholders and lenders may also need to be managed, as these stakeholders may have to prioritise pensions more than they have done so in the past.”

Though the regulator’s guidance had not yet been published, Ms Amin said it was likely that “trustees will have to have increasing involvement in discussions around some routine business activities”.

Under the new act, which is expected to become law this week, corporates “cannot afford to see pensions as a separate issue”, she said.