Reckless mishandling of pensions – a new corporate criminal offence

Reckless mishandling of pensions – a new corporate criminal offence

When BHS finally collapsed into administration it did so with a £571m pension deficit and consequently, 20,000 pension scheme members were left with financial uncertainty. The political fallout led to Sir Philip Green agreeing to pay £363 million back into the insolvent fund to avoid further backlash.

In an attempt to prevent this type of scandal arising out of high-profile corporate failures, the UK government has recently announced plans to introduce new criminal offences aimed at directors and company owners who mismanage employee pension funds. The white paper considers Defined Benefit pension schemes, which are relied on by around 10.5 million scheme members and account for £1.5 trillion in assets (equivalent to roughly three quarters of the UK’s annual GDP). 

Amber Rudd, the work and pensions secretary, has stated that current fines for pension mismanagement are simply not adequate and has suggested a new offence that could result in unlimited fines or a prison term of up to seven years, designed to punish “wilful or reckless behaviour” relating to a pension scheme.

The proposals published by the government therefore targets individuals who endanger workers’ pensions through chronic mismanagement of the business, including allowing unsustainable deficits to build up, taking huge investment risks or a combination of these.

It is hoped that the new criminal sanctions will provide the Pensions Regulator with stronger and more proactive powers in dealing with employers who deliberately avoid pension scheme liabilities. These include issuing unlimited fines, disqualification orders and criminal offences for company directors and other associated persons.

What are the key proposals?

The government has proposed the following key changes:

Building on the Regulator’s “reactive and retrospective” anti-avoidance powers by giving it the power to intervene in high-risk transactions that pose a threat to existing Defined Benefit schemes.  Where a company has a scheme in their corporate group, they should notify the Pensions Regulator before taking any actions that are materially detrimental to the ability of a scheme to meet its liabilities, for example, by changing creditor priority to rank ahead of the pension scheme upon insolvency, a return of capital and/or other mechanisms that would result in value being removed from the employer.

Directors may also be required to issue a ‘Declaration of Intent’ before taking certain specified actions, confirming that they have appropriately considered the impacts to any Defined Benefit pension scheme affected. Where these proposals raise concerns with the Regulator it will then have increased inspection and information gathering powers, including the power to compel a relevant person (eg. a director) to be interviewed in relation to the proposed action.  

Criminal offences may, therefore, extend beyond directors who are guilty of “wilfully or grossly reckless behaviour” in relation to pension schemes; a failure to comply with the above requirements will likely also amount to a secondary criminal offence in the same way as other areas of corporate regulation.

The proposals also encourage information sharing between the Insolvency Service and the Pensions Regulator to strengthen the deterrent of Director Disqualification that already exists for company directors “whose behaviours do not meet the expectations of the role, including where a pension scheme and its assets are poorly managed.”

How will this affect you and your business?

The Government’s white paper suggests that fixed and escalating fines could be applied retroactively for non-compliance as an alternative to criminal sanctions, in order to drive cooperation between schemes and the Regulator. However, while no new criminal sanctions have yet come into force, the Government’s firm stance on holding business owners and directors accountable in this area in the future could not have been made clearer.

It would be prudent for directors and employers to review their business practices to ensure that proper procedures and reporting regimes are in place in relation to pension management. Company officers tasked with administering pensions schemes, as well as pension fund trustees, may also be caught by these sanctions when they are implemented.

Although the wilful mismanagement of a pension fund will be a rare occurrence it is likely that the new regulatory framework and criminal offences will be widely drawn, to catch businesses that do not have adequate procedures and controls in place and who fail to comply with reporting requirements.

How we can assist

We regularly deal with complex fraud, business crime and regulatory investigations and are on-hand to advise on developments in this area. If you have an enquiry related to this or any other area of corporate criminal law, please contact our Crime and Regulatory team on crime@blasermills.co.uk.