Clive Weber and Katie Whitford of Wedlake Bell evaluate the government's new offences for defined benefit negligence, testing them out on past scandals such as BHS and Carillion.
Wilful or reckless treatment of a pension scheme will be punishable by up to seven years’ imprisonment and/or unlimited fines (in addition to a new civil penalty of a fine up to £1m) under the new law. The policy was a response to the public outcry over the handling of the BHS pension scheme, arising from BHS’s administration in 2016.
Speculation has been rife about whether this new law would actually apply to any of the high-profile collapses seen in recent years. BHS and Carillion are the two most commonly cited examples.
This is a wide net likely to catch only the worst cases of dereliction of duty falling short of actual fraud
The scope of the new offence will depend on the drafting of the legislation, and in particular any defences, which we are yet to see. Amber Rudd, the secretary of state for work and pensions, has stated that the aim is to target "wilfully or recklessly mishandling" in relation to pension schemes.
Would it have worked in the past?
Some behaviour may be so poor that the legal test will be obviously satisfied. However, these cases are likely to be very rare – most cases are likely to be in grey territory dependent on the precise evidence and facts.
Our view is that, had it existed at the time, the test could well have been satisfied in BHS based on the Pensions Regulator's published views, but would unlikely to have been satisfied in the case of the Carillion directors.
According to the regulator, the sale of BHS was without appropriate mitigation for its pension scheme deficit and steps were taken by Philip Green and others to prevent a liability to BHS's pension schemes falling due while it was part of the Taveta group – matters highlighted by the regulator in its warning notices issued on November 2 2016 to Sir Philip and others.
In contrast to the drama surrounding the sale of BHS, the demise of Carillion was a slow-burning affair, with some regulator involvement over many years in Carillion's deficit-recovery plans. It is much trickier in these circumstances to make the new offence stick, let alone contribution notices, under the existing legislation.
Defences create unknowns
There will be many imponderables in drafting any defences to the proposed new criminal offence. For instance, can there be recklessness where a party has taken professional advice and/or engaged with the scheme trustees and/or the regulator?
How far will commercial circumstances justify particular dealings with the pension scheme? How far will acts or omissions be coloured by the outcome, rather than the facts as they stood before a decision is made? These questions underline the difficulty of drafting and applying the new wilful/reckless tests.
The government has in its sights a wide range of potential persons whom it regards as having responsibility for a pension scheme, including "directors, sponsoring employers and any associated or connected persons, and in some circumstances trustees". This is a wide net likely to catch only the worst cases of dereliction of duty falling short of actual fraud, which has its own existing legislative framework.
Contribution notices rarely issued
A more straightforward law is the new criminal offence for failure to comply with contribution notices, which will carry unlimited fines but no imprisonment.
The principles here are black and white: either a party has failed to pay in response to a contribution notice, or it has not. The possibility of criminal liability is likely to encourage challenges to the validity of the contribution notice itself.
This offence might have applied in recent cases, if contribution notices had been issued by the regulator, any legal challenge to their validity had failed, and the notices had been left unpaid.
In reality, in the BHS case TPR got as far as issuing warning notices, but then settled at £366m with Sir Philip and withdrew its warning notices. In Carillion, the regulator is considering what enforcement action to take and no contribution notices have been issued to date.
The review of the existing regime of regulatory powers and criminal and civil sanctions is welcome. While the jury is out on the detail of the new criminal offences, their existence should be a powerful future deterrent to wrongdoing.
Clive Weber and Katie Whitford are partner and solicitor, respectively, at Wedlake Bell
