Introduction
Many thanks for inviting me today.
It’s been a while in the making; I was initially invited to speak last year, but we weren’t in a position to publicly debate many aspects of what was still then the ‘Pension Schemes Bill’.
Section 107, which has naturally been a focus and keen interest for many, would have been particularly difficult to discuss as it was still to be ratified in parliament.
I don’t think the ink was dry on the vellum before Saul booked in for this webinar. It’s very pleasing to have been invited to speak with you so soon. We are always happy when a keen interest is expressed in our work and how we approach our regulatory functions. It gives us confidence that people are keen to keep on top of emerging issues and to keep doing the right thing.
I know that you and anyone impacted by the new Act are looking for clarity on what the new powers given to The Pensions Regulator (TPR) will mean in practice.
It’s important to appreciate that the new powers we have been afforded are part of a strong package of measures to strengthen our regulatory grip and the options available to us, but they are not going to turn us into a belligerent law enforcement agency or the 'Pensions Police'.
You will not see an immediate uptick in our issuing of fines, prosecutions or pursuing prison sentences. It’s our sincere hope that the mere existence of these increased powers will further deter wrong doers from doing wrong.
If not, these powers will enable us to better tackle and punish those wrong doers, to the benefit of pension savers and the wider regulated community who ‘do things right’.
In short, if you are doing the right thing you have little to worry about. We will continue to regulate as we have. Being quick, clear and tough. We will continue to guide, advise and clarify. We will continue to work closely with stakeholders and supervise carefully those who need particular support. We will continue to focus on our statutory objectives and the delivery of our corporate strategic priority of protecting pension savers.
The Act doesn’t mean the current system is being completely overhauled. It broadens the weapons in our arsenal for tackling those avoid debts to defined benefit (DB) schemes or act so as to put scheme benefits at risk. We don’t think it’s going to change the behaviour we investigate, although it will fundamentally change the options available to us.
The Pension Schemes Act helps us build on our 'clear quick and tough' approach and, although it introduces some significant new penalties and criminal offences, we are not becoming a prosecution-hungry organisation.
We will use the new powers in a proportionate and appropriate way.
The Pension Schemes Act
I’m going to spend the next few minutes looking in a bit more detail at the Act and what it means.
It’s worth bearing in mind that although the Act has passed into being, the way it will be deployed is developing. An Act like this does not emerge fully fledged. Its intent relies on organisations like ours to develop policy, guidance, code - put the theory into practice – and ultimately to use the powers and develop decisions and case law. That is to say that it will develop over time.
What I share with you now should be considered as early interpretation; our view, but open to change as our experience and understanding of these new powers improves.
Some elements of the Act are new, others develop established powers and themes. Overall, we think the changes in the Act will also help us drive better standards across the schemes we regulate and better equip us to protect savers.
The Act builds on the existing approach to DB funding and sets new requirements. Requirements which will help trustees focus on long-term planning. It also clarifies what is expected of schemes based on their own circumstances. Regulations will be developed by the government providing further detail.
The Act highlights that pension scheme trustees should be considering the effects of climate change and will require them to engage more fully with the risks and opportunities arising from it. A scheme that does not consider climate change is ignoring a major risk to pension savings and missing out on potential investment opportunities.
New and enhanced information-gathering powers, such as the interview and wider inspection power will aid our investigations. New fixed and escalating civil penalties will mean proportionate and timely enforcement action can be taken against those who delay or fail to comply and help us secure the information we need sooner.
The Act also introduces two new ‘act’ tests for our Contribution Notice (CN) power, in addition to the existing main purpose and material detriment tests. These will look at the time of the act or failure, and the impact on:
- the amount that would be recovered by the scheme in the hypothetical event of an employer’s insolvency – the employer insolvency test; and
- the value of the employer’s resources relative to size of the scheme – the employer resources test
New civil penalties of up to £1 million have been introduced for:
- main purpose or material detriment acts; as well as those who:
- fail to comply with a CN
- deliberately provide false information to us or trustees or fail to comply with requirements under the notifiable events framework
Strengthening the deterrent in the system and giving us more options to address and punish wrongdoing.
We will review and revise TPR publications that relate to funding, avoidance and penalties, including our Material Detriment Code and code-related guidance to include content about the new forms of CN ‘act’, and our clearance guidance.
As for wrong doing. The Pension Schemes Act also introduces two new offences, with a potential seven-year jail term and unlimited fine, for avoiding employer debt to a scheme or behaviour risking accrued scheme benefits. This will be available for us to use where we see behaviour which intentionally or recklessly puts DB savers’ benefits at risk.
The offences are not yet in force but are expected to be by autumn. We have just issued our draft policy for consultation.
A person can only be successfully prosecuted if all the elements of the offence are shown to be met. Including whether they intended to avoid employer debt to a DB scheme. Knew or ought to have known their act or failure would put DB savers’ benefits at risk; and they had no reasonable excuse for acting as they did.
Each element of the criminal offence, would also need to be proved to the criminal standard of ‘beyond reasonable doubt’. These are high thresholds for any prosecuting authority to meet.
Concerns have been expressed about the introduction of these offences, and that there has been significant interest in our approach to their investigation and prosecution.
Accordingly, and in response to the request from Ministers during the passage of the Bill, we have developed and published our draft policy.
It sets out how we intend to approach the investigation and prosecution of these offences. We will be guided by our understanding of the policy intent of the offences. Which is not to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour, but to enable us to tackle the more serious intentional or reckless conduct that was already within the scope of our Contribution Notice power, and to increase the deterrent and punishment of such conduct.
Please get involved with our consultation. We always benefit from diverse points of view. You can find details on our website. The consultation closes on 22 April 2021.
A few points to note from the draft are:
- we expect the new criminal offences to broadly apply to the same kind of behaviours already in the scope of our existing contribution notice powers, or that would be in scope if the person was connected with the scheme employer
- the introduction of the offences is not expected to change the kind of behaviour we investigate but will be a fundamental change to the options available to us, where the seriousness of the behaviour warrants such intervention
- when prosecuting the offences, not only will we need to show the person’s requisite intention, but the onus will be on us to prove that the accused did not have a reasonable excuse
‘Reasonable excuse’
The issue of ‘reasonable excuse’ is something I know you are keen to know more about.
Any phrase that contains an element of elasticity or subjectivity tends to bring nervousness. Especially, and understandably, in conjunction with criminal law.
So, what do we, TPR, consider constitutes ‘reasonable excuse’?
Given the breadth of avoidance-type behaviour, it’s impossible to provide a definitive answer. Ultimately, the courts will decide whether a person prosecuted has a reasonable excuse and will decide whether to impose a sanction.
However, if you are already familiar with our avoidance powers, you will have a good idea what will concern us. Our draft policy includes a list of factors that are likely to be significant to our assessment; and we have provided illustrative examples, from our experience of exercising our existing powers, that we would consider to be in scope for prosecution.
We have aimed to be as helpful as we can be in the draft policy without limiting the scope of the powers set out by Parliament. It’s a tricky balance, but much of our role is a balancing act. We act as a fulcrum between many parties - savers and sponsors, employers and trustees, government and the regulated community.
We’ve already received calls to clarify more precisely which behaviours constitute reasonable excuse. This work is iterative and will naturally develop as we begin to investigate and use these new powers.
We are not able to offer concrete examples at the moment.
Also, our view is only one aspect of this. We will all learn and adapt in response to decisions of criminal courts. We will update the policy as precedents are set.
So, my honest response to you now is - familiarise yourself with the draft and get involved in the consultation - that way you can help shape the policy. And if that’s not a reason to take part, I don’t know what is.
An area already generating comment is the subject of restructuring.
Thinking about ‘reasonable excuse’, we understand that many employers are facing challenges as a result of COVID-19 and Brexit.
Tough decisions will have to be made by some DB scheme employers or their corporate groups.
Those challenges would be highly relevant to our view of the reasonableness of conduct. The nature of 'reasonable excuse' is that it will recognise the specific circumstances the person is in at the time they take a relevant decision.
If parties involved in those decisions can demonstrate they considered the impact of their actions on the scheme; and either secured full mitigation for any detriment or can demonstrate there was no viable alternative with a less detrimental impact in light of any mitigation provided, they should not be at risk of prosecution by us.
Taking another specific context that might interest you: advisers, and whether they could give advice that we regard as 'encouraging', or “assisting” the commission of one of these new offences.
In this case, as in all others, we will take account of the policy intent behind the offences. A person will only commit the offence if they do not have a ‘reasonable excuse’ for what they are doing. A professional person, acting in accordance with all professional duties, conduct obligations and ethical standards applicable to the advice being given, is likely to have a 'reasonable excuse'.
Any prosecution would need to meet the ‘public interest’ test in the Code for Crown Prosecutors, and those of you advising in that space will be only too aware of the high threshold that rightly imposes.
I’d like to stress again that TPR is a risk-based and proportionate regulator and this measured approach will continue with how we use these new powers. Our goal is to work with Department for Work and Pensions, the regulated community and wider industry and stakeholders to ensure the new measures are introduced in an effective way. We will we only use these powers where it is appropriate and reasonable to do so.
I’m sure you will have more questions for me afterwards and I look forward to those. I welcome all your views on how we should approach these powers, including on how we should consider whether an excuse is a reasonable one and on our draft policy as a whole.
Impact of the pandemic on the exercise of TPR’s enforcement powers
It would be peculiar if I didn’t spend a minute reflecting on the current situation and share with you some thoughts about the pandemic.
Covid has clearly had a huge effect on the economy; on employers and schemes, and the impact is likely to be felt for some time.
We are alert to the added pressures that most people are facing. We acted quickly and proportionately when the pandemic first hit. We introduced temporary easements, giving flexibility and breathing space. We endeavour to always take a proportionate approach to enforcement decisions, and that proportionality is guided by an acute awareness of the context within which we are all operating in these challenging times.
We know that the best support for a pension scheme is a strong employer. So it’s vital that we support businesses and trustees through this crisis while balancing the risks to members and the Pension Protection Fund (PPF).
We issued Covid-19 guidance for schemes and employers, and we allowed schemes an extension on reporting payment failures in automatic enrolment.
But there needs to be a balance. We can be understanding of the stress on employers, but we must not forget the saver or the PPF.
The saver must be protected, which is why our new Corporate Strategy puts the saver at the heart of all our work.
We expect schemes to be treated fairly by employers. We would be concerned if companies were not following our clear guidance appropriately.
We are monitoring the situation closely and we will continue to use our powers – old and new – to keep the saver at the heart of everything we do.
Conclusion
If nothing else, I hope the last few minutes have proved how much consideration and effort we are giving to the Act. We are also alive to the wider circumstances in which it has arrived and the breadth of its potential impact.
Though we are the sole regulator of work-based pensions, we don’t work alone. I hope your previous interactions with us have demonstrated our willingness to listen and learn, as well as to say what we think and why.
This will always be our approach and I’ll end by asking for your input into the current consultation. Putting life into legislation must be a collaborative act. We are all responsible for the stability and sustainability of pensions and those savers who rely on them.
Thankyou.
