Pension Schemes Act 2021: Impact on the UK Bailout Culture | Jones day

In summary

The situation: The Pension Schemes Act 2021 introduces two offenses and fines applicable in connection with UK defined benefit pension plans if any person whose willful or reckless behavior adversely affects member performance. The new provisions are far-reaching and came into force on October 1, 2021.

The result: Any person (other than bankruptcy administrators according to their role) involved in a restructuring, including lenders, financial sponsors and professional advisers, could commit one of the new offenses unless that person has a “reasonable excuse” (in the legislation not defined). for their action or behavior.

Looking ahead: These new measures can lead to greater caution in restructuring by sponsoring employers (and their stakeholders), which can lead to higher rates of business failures.

In recent years, with regard to bankruptcy and restructuring, the UK Government has sought to promote a stronger culture of bailout that gives companies better opportunities to restructure and reorganize while continuing to operate. In particular, the Corporate Insolvency & Governance Act 2020, which came into force in June 2020, has the stated goal of ensuring that companies maximize their chances of survival. At the same time, a number of high profile corporate failures, including BHS and Carillion, left many companies with significant pension shortfalls, the cost of which is ultimately borne by UK taxpayers.

In response, the UK government has introduced new offenses and fines when a defined benefit pension system has been compromised. As discussed below, these new measures could undermine the very rescue culture that the UK government has been trying to foster. The new regulations came into force on October 1, 2021.

The two offenses apply only in the context of defined benefit pension schemes, but can apply to any person involved in the activity concerned (with the exception of insolvency administrators who act according to their function). In summary, these are:

• Proceed under Risk of Credited System Services: A criminal offense is committed when a person commits an act or behavior that significantly affects the likelihood of receiving system benefits and the person knew (or should have known) that the act or act would have that effect; and
• Avoidance of employer debt: A criminal offense is committed when an individual intentionally engages in any act or conduct that: (i) prevents the recovery of all or part of an employer’s debt under Section 75 (that is, debts due by the employer to the trustees) an underfunded defined benefit plan in certain circumstances under Section 75 of the Pensions Act 1995); (ii) prevents such debt from becoming due; (iii) compromises or otherwise settles such debt; or (iv) reduce the amount of any such debt that would otherwise become due.

In either case, there is no criminal offense if the person had a “reasonable excuse” for the particular act or conduct, but there is no definition of “reasonable excuse” in the law. In September 2021, following a consultation process, the Pension Authority (“Regulatory Authority”) published its policy (“Policy”) on the use of its new powers. In its policy, the regulator states that there are three factors it believes are important in determining whether there is a reasonable apology:

• To what extent the adverse effects on the system / system services were a coincidental consequence of the act or omission and not a fundamental step necessary to achieve the purpose of the person. The more fortuitous the detriment to the person’s intention, the more that intention would tend to give rise to a reasonable excuse;
• The adequacy of any mitigation measures to offset the adverse effects. The more the harmful effects have been mitigated, the more likely the person will have a reasonable excuse. In assessing the adequacy of the mitigation, the regulator expects the system to be treated fairly to other employers’ stakeholders, taking into account their relative financial interests; and
• If no or insufficient mitigation was envisaged, whether there was a viable alternative that could have avoided or reduced the adverse effects. If there were a viable alternative with fewer ill effects, it would suggest that there is no sane excuse. However, the regulator will generally not expect anyone to pursue an alternative that involves improperly disregarding their interests.

In the directive, the regulator gives a number of examples and a detailed case study in which it expresses its views on the presence of these factors. In line with Parliament’s intention for the legislation, the regulator appears intended to use its new powers only for more serious willful or reckless behavior. However, the guideline represents only the views of the regulator and is not legally binding. Such guidelines also do not reflect the views of the State Secretary or the Director of the Public Prosecutor’s Office, who are also empowered to initiate proceedings, although the guidelines are likely to be convincing. Ultimately, the courts have to decide.

Given the broad scope of the legislation, any person involved in the restructuring (such as lenders, financial sponsors and professional advisers) could commit a criminal offense in the context of a restructuring. As mentioned above, there is an explicit outsourcing for any liquidator acting in accordance with their functions. All parties to the transaction (not just the employer and its affiliated or related parties) must carefully consider whether it poses a risk to the system’s accrued benefits or whether it prevents or reduces the maturity of Section 75 debts, and what may constitute a “reasonable apology” given the alternatives available to reorganize. In the event of a subsequent failure of the company resulting in a loss to the pension system, it is likely that the restructuring will be checked against the likely outcome of the alternative scenarios.

A person found guilty of either offense can face an unlimited fine and / or imprisonment of up to seven years.

The Pension Schemes Act 2021 also gives the regulator new powers to impose a penalty of up to £ 1 million on any person who was involved in any act (or willful default) that resulted in any of the offenses, but not: if this person has been convicted of this crime or criminal proceedings have been initiated but not yet concluded. In particular, the civil sanction extends to any person who “knowingly helps” with the act (or omission). If a legal person is involved and the act in question has been taken with the consent or condolence of a director, manager, secretary or other similar official, the regulator may punish that person in lieu of the legal person.

The introduction of criminal sanctions and substantial financial sanctions, which can be imposed not only on those directly involved in a restructuring but also on those who “knowingly help”, is likely to put a heavy burden on restructuring and bailing out companies with defined benefit pension plans. The protection offered to insolvency administrators is of limited practical use as there are many other persons involved in a transaction who could face sanctions.

While the new rule will undoubtedly encourage more parties to seek regulatory approval prior to any proposed reorganization (despite the fact that the approval process does not extend to the new offenses), in many emergencies there is pressure to act quickly for one Giving companies only one chance of survival could mean that there is insufficient time for stakeholders to communicate and reach agreements with pension trustees and the regulator. This, combined with the risk of criminal penalties and / or significant penalties, can lead to greater caution on the part of sponsoring employers (and their stakeholders) and higher levels of business failure to the detriment of all stakeholders.

Three important lessons

1. The UK Government has introduced criminal offenses and fines in relation to defined benefit pension schemes for anyone whose willful or reckless behavior adversely affects members’ performance.
2. The provisions are far-reaching and anyone involved in a restructuring (other than liquidators acting in accordance with their duties) could run into them unless they have a “reasonable excuse” (in the legislation not defined) for their action or course of behavior.
3. All parties to a transaction with a defined benefit pension scheme must carefully consider whether the transaction will present a risk to the scheme’s accrued benefits or whether it will prevent or reduce the maturity of Section 75 debt, and what a “reasonable apology” may constitute ” given the available courses of action or behavior.