The government has guaranteed that new criminal sanctions introduced in the pensions schemes bill are not intended to disrupt legitimate corporate activity, but has refused to revise “widely” worded powers to go after those linked to defined benefit schemes.
Peers representing the government assured the House of Lords that the Pensions Regulator will publish guidance on the bill’s application in a debate on Thursday.
New powers for the regulator in relation to DB schemes form a key pillar of the legislation, including the introduction of new criminal offences, with the most serious carrying a maximum sentence of seven years’ imprisonment and a civil penalty of up to £1m.
Members of the House of Lords had criticised the wording of the measures specified in Clause 107 in a debate on the bill in late January, with peers pointing to a number of issues with the new legislation.
At the time, they urged the government to review the scope of new criminal sanctions, since these have “been drawn incredibly widely” and could “deter respectable people from becoming trustees”.
We must ensure that there are sufficient safeguards to protect members’ pensions from the minority who are prepared to put them at risk
Earl Howe, House of Lords
A series of amendments were then introduced by the peers, which were discussed in a debate on Monday.
Earl Howe, deputy leader of the House of Lords, argued that “in proposing these criminal offences, it is absolutely not the government’s intention to interfere with routine business activities”.
The Conservative party member said TPR will continue to be responsible for making sure that employers balance the needs of their DB pension schemes with growing their businesses.
“However, it is important that where the elements of the offences are met, no matter who has committed them, TPR should be able to respond appropriately,” he said.
In response to calls for individuals who could commit the offences to be restricted, he noted that this would “create a loophole for these people to act in such a way”.
Amendments would weaken sanctions
Lord Howe noted that “it is clear that the majority of employers want to do right by their scheme”.
“However, we must ensure that there are sufficient safeguards to protect members’ pensions from the minority who are prepared to put them at risk.”
He explained that if the category of person whose conduct is within the scope of the offences were to be narrowed as some of the amendments propose, “the deterrent provided by the offences would be weakened, as indeed would the safeguards built into them”.
All the proposed amendments for changing the wording in the legislation were either not moved or withdrawn following the debate, in which Lord Howe gave three examples of the type of acts that could fall within the new criminal offences.
The first example is the sale of an employer with a DB scheme without replacing an existing parental guarantee over the employer’s Section 75 debt, resulting in the loss of the guarantee, including failing to tell the trustees about the sale in advance.
Key features of the pensions bill
Providing a framework for the establishment, operation and regulation of collective money purchase schemes (commonly known as CDC pensions).
Strengthening the Pensions Regulator’s powers and the existing sanctions regime. This will include introducing new criminal offences, with the most serious carrying a maximum sentence of seven years’ imprisonment and a civil penalty of up to £1m.
Giving the regulator powers to obtain the right information about a scheme and its sponsoring employer in a timely manner, ensuring that it is able to gain redress for pension schemes and members when things go wrong.
Providing a framework to support pensions dashboards, including new powers to compel pension schemes to provide accurate information to consumers. This will include provisions for the regulators to ensure relevant schemes comply.
Creating regulations to set out circumstances under which a pension scheme member will have the right to transfer their pension savings to another scheme.
Improving the DB scheme funding system by requiring a statement from trustees on their funding strategy.
Amending the legislation for the Pension Protection Fund compensation regime to enable the lifeboat to continue to apply the compensation regime as intended and amend the definition of administration charges.
A second case would be the purchase of a company, subsequent mismanagement of that company and extraction of value prior to it going into administration, while a third might be the stripping of assets from the employer, resulting in a substantial weakening of support for the scheme, he explained.
“I do not mean to suggest that that is an exclusive list, but I hope it gives the committee a flavour of the actions that we are targeting,” he said.
TPR to publish guidance
Lord Howe also revealed that TPR intends to issue further specific guidance explaining its approach to prosecuting the new offences.
He said: “It is expected that, following royal assent, the regulator will consult on the contents of the guidance for the new offences and expects to publish this guidance prior to commencement.
“It is clearly important that the industry’s views are sought on what is contained in the guidance.”
David Everett, partner at consultant LCP, noted it was expected that the government would hold its ground in this matter.
“Unless something happens at report stage, attention must now turn to the promised regulator guidance,” he said.
“Until we see this, we have just a few words of intent from the government to stand alongside what, on a reading of the words, is a sweeping new power which will remain of concern to scheme sponsors, trustees and their advisers, all of whom remain exposed to the Clause 107 provisions.”
Simon Kew, director of Deloitte's pensions financial advisory practice, said the bill wording could unintentionally backfire on the government.
"There’s no question that the criminal element of the bill is well meaning and is intended to halt any ‘sharp practice’ that may be detrimental to a pension scheme. The breadth of the wording, however, could unintentionally prevent actions that are beneficial, for fear of falling within the bounds of the criminal sanctions," he said.
Mr Kew continued: "As an example, there has been recent encouragement from TPR and the DWP for trustees to consider ESG [environmental, social and governance risks] in their investment portfolios. If they switch and that strategy reduces returns, it could be considered an act that reduces the likelihood of scheme benefits being met. We will see what guidelines the regulator releases in due course, although if TPR has the power to enforce, they will do so where they see fit as they are a creature of statute."
The pension schemes bill will have another reading at the committee stage in the House of Lords on March 2, and will then proceed to report stage before having its third reading and being passed to the House of Commons.
It is expected to reach the House of Commons by Easter.
