New criminal sanctions could be difficult to enforce, experts say

Last year, the Department for Work and Pensions launched a consultation looking at powers for the Pensions Regulator.

If it’s not going into the scheme, we haven’t made things better for the scheme have we?

Anne-Marie Winton, Arc Pensions Law

The document sought views on proposals to introduce a new criminal offence for wilful or reckless behaviour in relation to a pension scheme. It also proposed a new civil penalty of up to £1m for serious breaches.

In a foreword to the government’s response, published on Monday, Amber Rudd, secretary of state for work and pensions, said the government intends to go ahead with its proposal to introduce criminal offences.

Proposed sentence increased to seven years

“The first will target individuals who wilfully or recklessly mishandle pension schemes, endangering workers’ pensions, by such things as chronic mismanagement of a business; or allowing huge unsustainable deficits to build up; or taking huge investment risks; or a combination thereof,” she said.

The government will introduce a new custodial sentence of up to seven years’ imprisonment or an unlimited fine for this offence. This has increased from the maximum of two years first proposed in the consultation.

The second will attract an unlimited fine and will target those who fail to comply with a contribution notice, issued by the Pensions Regulator. “We will also introduce a new civil penalty of up to £1 million for this offence,” Rudd added.

A powerful deterrent

Nicola Parish, executive director for frontline regulation at the regulator, said: “We welcome the proposed new powers which, as a package, would allow us to identify potential problems earlier and take more effective action.”

However, she noted that the majority of scheme sponsors and trustees “already do the right thing”, adding that the regulator will be helping them further by delivering clearer funding standards and a revised defined benefit code of practice.

“Our new powers will act as a powerful deterrent against the poor treatment of pension schemes and help us in protecting members. We are working closely with government to ensure that the new legislation is effective and works in practice,” Ms Parish said.

In the government’s response, it said many respondents to its consultation sought further detail on how criminal sanctions would be practically applied, particularly questioning how reckless or wilful behaviour would be defined.

Difficult to prove

Tim Smith, professional support lawyer at Herbert Smith Freehills, said the criminal sanctions could be difficult to enforce from an evidential perspective.  

“It’s interesting that the fine is actually a civil penalty… so that would be a lower standard of proof that the regulator would have to meet,” he said.

“I would expect in all but the most extreme cases, you’re likely to see the regulator go more towards the £1m fine civil penalty, as opposed to the custodial sentence – and I wonder if that’s more there as a deterrent than something we’re actually going to see much of in practice,” Mr Smith said.

Anne-Marie Winton, partner at Arc Pensions Law, agreed that questions remain in terms of how the criminal offences will be enforced.

She said that “it does take them into the unknown, from the regulator’s perspective, about whether they actually are able to collect or would be able to collect evidence that passes that ‘beyond reasonable doubt’ level of test”, used in criminal law.

Unlikely to take effect before 2020

The high-profile collapses of Carillion and BHS have put increased pressure on the government and the regulator to protect DB members.

“When we have the next high profile corporate failure of an employer with a DB scheme, there will be significant pressure on the regulator to use these powers,” said Mr Smith.

However, it could be a while until we see the new powers come into effect.

Some of the changes, particularly the new criminal offence, will need primary legislation, said Mr Smith, adding that “it’s going to be spring next year at the earliest that we’re likely to see these actually coming into force”.

Where will the money go?

Generally, the government response is “fairly lacking in detail” he added, noting that while there is some confirmation of direction of travel, there is still a lot of detail yet to be set out in guidance or regulations when the legislation actually comes through.

With regard to the criminal offence, in particular, there are still questions over what the criminal test will be.

“When we talk about wilful or reckless actions, in relation to the pension scheme, is that going to be measured on an objective basis or will they need to show some sort of motive or intent on behalf of the individual that they actually intended to damage or mismanage their pension scheme in some way?,” Mr Smith said.

Ms Winton highlighted that it is unclear whether fine money will go into the pension scheme or elsewhere – such as the Treasury.

“If it’s not going into the scheme, we haven’t made things better for the scheme have we?” she said.

In its recent response, the DWP stated that “the government is giving consideration to the treatment of civil penalty proceeds, including the interaction between TPR’s powers to issue civil penalties and its anti-avoidance powers (for example, imposing a Contribution Notice on the employer or connected/associated parties)”.