Pension Schemes Act 2021: the potential impact on restructurings
Andrew Spink QC and Helen Pugh signpost the potential impacts of the Pensions Scheme Act 2021 on restructurings.
The Pension Schemes Act 2021 (‘the Act’) addresses a number of critical areas concerning pensions, and importantly brings about a number of significant changes. The focus of this briefing note is upon 4 key areas relevant to restructurings:
- The creation of two new criminal offences with penalties of up to 7 years’ imprisonment and an unlimited fine;
- Mirror civil liability with penalties of up to £1m;
- The expansion of the existing contribution notice/ moral hazard powers of the Pensions Regulator (‘TPR’);
- The expansion of notification requirements for certain corporate activity.
Whilst the Act received Royal Assent on 11 February 2021, it is not anticipated that these provisions (in Part 3 of the Act) will be brought into force before autumn 2021. Further, guidance from TPR is anticipated in relation to its new civil powers and the new criminal offences.
- Two New Criminal Offences: The Act creates three new criminal offences, of which two are relevant in the restructuring context, each carrying maximum penalties of seven years imprisonment or a fine or both:
- Avoidance of employer debt (s.58A Pensions Act 2004 (“PA 2004”)): Applies where a person does an act or fails to act or engages in a course of conduct intended to prevent the recovery of employer debt under s.75 of the Pensions Act 1995 (“75 debt”), to prevent such a debt becoming due or is to compromise or settle or reduce the debt otherwise due (which of course is extremely common in a distressed rescue situation).
- Conduct risking accrued scheme benefits (s.58B PA 2004): Applies where a person does an act or fails to act or engages in a course of conduct that detrimentally affects in a material way the likelihood of accrued scheme benefits being received, and the person knew or ought to have known of that effect.
And in both cases where there is no ‘reasonable excuse’ for the actions.
‘A person’ can be liable, not just ‘connected persons’, and so trustees, lenders, professional advisers all need to be aware of the new parameters within which they can act. Each of the offences apply to defined-benefit schemes and on their face they could apply to, for example, grants of new prioritised security or to a decision to continue to trade pending a planned restructuring.
- Mirror Civil Offences: As an alternative to pursuing criminal prosecution for breach of the two new criminal offences, TPR can instead impose civil penalties of up to £1m. Civil liability will be adjudged on the civil standard of proof.
- Contribution Notices (‘CN’) – Prior to the Act, TPR could issue a CN if either the material detriment test or the main purpose of an act or failure test were met (s.38 of PA 2004). The effect of a CN is to make the subject recipient liable to contribute to or support the pension scheme. The Act introduces two new grounds for issuing a CN, both of which are relevant in a distressed restructuring situation:
- The employer insolvency test (s.38C PA 2004): An act or failure to act which materially reduces the debt likely to be recovered from the employer in the event of an immediate insolvency; and
- The employer resources test (s.38E PA 2004): An act or failure to act which reduces the value of the resources of the employer in a manner which was material when compared with the estimated s.75 debt in relation to the scheme.
These new ‘moral hazard’ powers apply to ‘connected persons’ and TPR must be satisfied that the defence in ss.38D or 38F of PA 2004 do not apply. This defence, broadly based on the reasonableness of the person’s conduct, is in fact highly prescriptive and requires, amongst other things, that a person ‘took all reasonable steps to eliminate or minimise the potential for the act or failure to have such an effect’. This is similar to the existing s.38B defence to a contribution notice issued by reference to the “material detriment” test.
- New Corporate Activity Procedural Requirements: The Act imposes a duty on listed persons to notify TPR of ‘significant events’. Details of the anticipated regulations are awaited but the expectation is that there will be an expansion of the so-called ‘notification events framework’ to include a sale of a material proportion of the employer’s business or the grant of security in priority to a pension scheme debt. The fine for breach of the procedural requirements will increase to £1 million.
Find out more
In the field of pensions law, Andrew Spink QC is rated as one of the leading silks by the legal directories having appeared in some of the biggest and most significant CPR Part 7 & Part 8 pensions claims of the last two decades. He is a recognised specialist in dealing with cases involving the exercise by the Pensions Regulator of its “moral hazard” powers under PA04 including some of the leading cases on the application of the s.38A PA04 “material detriment test”. He has notable experience in cross-over pensions/ restructuring work, having appeared in some of the biggest cross-over cases including Lehman.
Helen Pugh is ranked as a leading junior in Insolvency in the Legal 500 2021. She has a broad insolvency practice, acting regularly for insolvency practitioners, corporates and directors. Her practice encompasses civil fraud and asset recovery. Helen recently joined Outer Temple Chambers to add to their contentious insolvency and restructuring team.
If you would like to discuss any of the issues covered in this bulletin please contact Andrew or Helen directly, or via their practice management team; David Smith at firstname.lastname@example.org or on 020 7427 4905 or Matt Sale at email@example.com
Barristers: Andrew Spink QC | Helen Pugh
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