16 September 2021

The Pension Schemes Act 2021: Directors, Lenders, Everyone, Take Heed!

Prompted by the high-profile collapses of the likes of BHS and Carillion, which left their employees facing severely diminished retirement funds due to pension scheme deficits of £275 million and £580 million respectively, the Government has proposed radical changes through the Pension Schemes Act 2021 (the “PSA”).

While you work to manoeuvre your business out from under the financial challenges imposed by the pandemic, you’d also be well-advised to pay attention to the wide-ranging provisions of the PSA so as not to fall foul of the new criminal and civil offences contained therein. What has changed? And why are the changes important for those in the corporate realm? Here, we set out an introductory overview of the new regime in terms of how they may apply to you and your business. (This article does not seek to explain the changes to the PSA as they may affect pension trustees.)

What type of pension does the PSA apply to?

The majority of the PSA’s provisions, including the new criminal offences, apply solely to defined benefit pension schemes (i.e. final salary schemes that guarantee a set retirement income), although certain provisions also apply to defined contribution schemes (i.e. money purchase schemes) where the retirement income is calculated according to how much is contributed into the scheme.

What are the new criminal offences?

The PSA has introduced two new criminal offences, being “the avoidance of employer debt” and “conduct risking accrued scheme benefits”:

  • The offence of avoidance of employer debt applies in relation to a section 75 debt, where a person, without reasonable excuse, does an act or engages in conduct that intentionally prevents the recovery of the debt in whole or in part, prevents the debt from becoming due, or otherwise compromises or settles the debt or reduces the amount that would otherwise fall due.
  • The offence of conduct risking accrued scheme benefits applies where a person, without reasonable excuse, does an act or engages in conduct that materially and adversely affects the probability of accrued scheme benefits being received, where such person knew or should have known that their act or conduct would have that effect.

In addition, where a person knowingly or recklessly gives the Pensions Regulator false or misleading information about a “notifiable event”, they will be deemed to have committed a criminal act. What will be considered a “notifiable event” is yet to be determined, but it is anticipated that it will include certain corporate transactions, such as the sale of a controlling interest, business or assets of the employer company and the granting of security in priority to a pension scheme’s debt. When notifying events to the Pensions Regulator, a pension scheme will be required to provide an accompanying statement which will set out prescribed information; in other words, it broadens the current duty on employers to disclose details of planned corporate transactions and activities to pension trustees and the Pensions Regulator.

On top of this, the PSA has also extended the list of people responsible for notification. This could now include other companies in the employer's group, directors and, potentially, those parties with links to the directors, such as the spouse or civil partner of the director.

Finally, the PSA provides that a person who fails to comply with a contribution notice without reasonable excuse will be guilty of a criminal offence. It also provides the Pensions Regulator with two further grounds on which to issue a contribution notice. See below for further detail.

Potential issues for employers

1. Who can be prosecuted: wide scope for the meaning of ‘person’.

Most notably, the PSA empowers the Pensions Regulator to prosecute a wide range of people if an offence is committed, including the employer company, directors, group company directors, investors, advisors and even lenders. Although the Draft Criminal Policy Document (the “Policy Document”), published by the Pensions Regulator in March 2021, aims to provide some much-needed guidance on the broad wording, in reality it appears to do little to remedy the vast number of categories of individuals and companies that the PSA has the potential to ensnare. It is to be hoped that the suggested amendments which were touched on in a speech by the Executive Director for Regulatory Policy, Analysis and Advice following a consultation on the Policy Document, namely improving the illustrative examples given, providing clarity on the criminal offences’ retroactivity and the seriousness of behaviour which could amount to a criminal offence, will provide some clarity, however indirect.

2. Ordinary business behaviour could be caught by an offence.

The offence of avoidance of employer debt, i.e. where a person, without reasonable excuse, intentionally avoids an employer debt and the offence of conduct risking accrued scheme benefits both have the potential to apply to ordinary business behaviour. For example, a restructuring could potentially prevent an employer debt from arising, as could entering into corporate rescue proceedings or entering into a transaction that reduces net assets for a future gain. In the case of conduct risking accrued scheme benefits, the person need not have any ill intent; they may be guilty of the offence if they were not aware of the effect of their conduct but should have been.

There is a risk that these new provisions will adversely affect ordinary business practices as those involved exercise more caution, particularly when the regime first comes into effect. Employer companies and their boards of directors may incur additional adviser costs to obtain comfort, more discussion around decision-making will no doubt take place and parties to transactions may require reassurance and further contractual protections.

The Minister for Pensions has said that it “is certainly not the intention to frustrate legitimate business activities where they are conducted in good faith” and that “reasonableness” is a factor in relation to the concern that ordinary business behaviour will be caught up in the broadly worded offences. What is reasonable will apparently depend on the particular circumstances of the act or failure to act, but at least the burden will be on the Pensions Regulator to prove unreasonableness.

While the Pensions Regulator is expected to publish (much needed) guidance about these issues, guidance will not override the law and businesses will be conscious that the courts will have the final say.

3. Increased powers for the Pensions Regulator to issue a contribution notice.

Currently, a contribution notice, which requires the recipient to make a payment into the pension scheme, may be issued by the Pensions Regulator on one of two grounds:

  • The ‘material detriment test’ – where an act or failure to act that occurred on or after 14 April 2008 had a material detrimental effect on the probability of accrued scheme benefits being received.
  • The ‘main purpose of an act or failure test’ – where the main purpose, or one of the main purposes, of an act or deliberate failure to act that occurred on or after 27 April 2004 was to prevent the recovery of an employer debt that was (or might become) due, to prevent the debt becoming due or to compromise, settle or reduce that debt.

Under the PSA, the Pensions Regulator will also be able to issue a contribution notice where one of the following tests is met:

  • The ‘employer insolvency test’ – where the value of the pension scheme’s assets is less than its aggregate liabilities and, if a section 75 debt had fallen due, an act or failure to act resulted in a material reduction of the amount of the debt that would likely be recovered by the scheme.
  • The ‘employer resources test’ – where an act or failure to act reduced the value of the employer’s resources and that reduction was a material reduction relative to the estimated section 75 debt.

These new grounds can be successfully defended if the relevant person duly considered the act or failure to act and took all reasonable steps to eliminate or mitigate the possibility or extent of the impact that the act or failure to act had.

Furthermore, while the Pensions Regulator now has a fairly wide scope within which to issue contribution notices, it may only do so if it is reasonable. In other words, it must be reasonable to impose a financial liability on the recipient.

Potentially however, these new tests could add an extra layer of bureaucracy to a number of corporate and financial practices. For example, in the context of the employer resources test, the focus is on the relationship between the size of the dividend (or distribution as the case may be) and the section 75 deficit, rather than the resources of the employer. As a result, if a company intends to pay a sizeable dividend or distribution, prior clearance from the Pensions Regulator may be needed.

What sanctions could apply for non-compliance?

Sanctions under the criminal offences are not to be taken lightly; anyone found guilty of an offence could face up to seven years’ imprisonment and/or an unlimited fine. Furthermore, a civil penalty of a fine (capped at £1 million) could be imposed instead of, or in addition to, the criminal penalties.

In relation to other civil offences under the PSA, such as the failure to comply with the notifiable events framework, a fine (capped at £1 million) could be imposed. Non-compliance with information requests (including inspections and interviews) or delays in providing the information may result in the imposition of a fixed and escalating civil penalty, still to be developed as part of the Government’s secondary legislation package.

When will the PSA come into effect?

The PSA received Royal Assent on 11 February 2021, but its provisions will come into effect piecemeal with some parts only likely to come into effect in 2022 (and possibly later).

Certain provisions, which are outside the scope of this note, have already been enacted, while those provisions which deal with the new criminal offences, financial penalties, contribution notices (including the new employer insolvency and resources tests), the majority of notifiable events and the Pensions Regulator’s information-gathering powers will take effect on 1 October 2021 (with interim provisions applying before that date).

How to can you prepare your business for life under this new regulatory approach?

The PSA is expected to significantly change the way that defined benefit pension schemes are operated. With the new criminal offences and the Pensions Regulator’s enhanced powers of investigation and sanction, good dialogue between employers and pension trustees and effective management of pension schemes will be essential.

  • Stay informed: employers should keep up to date on further regulations and guidance, particularly insofar as it relates to notifiable events and new contribution notice events
  • Check insurance cover: companies would be well advised to ensure their directors' and officers' liability insurance covers the civil penalties
  • Record decisions and have evidence available: maintaining an audit trail will be important to provide evidence of reasonableness, particularly where an employer company’s actions are questioned months down the line; for example, board minutes that reflect that the board has duly considered a possible negative impact of a transaction on the pension scheme and has taken steps, including details of what such steps entail, to eliminate or mitigate the risk of such impact occurring.

Pensions down the road

The PSA has attracted a fair amount of scrutiny and controversy on the basis that the new criminal offences could undermine the widely, and readily relied-upon, business rescue practices in the UK. The saving grace for many wishing to take part in business rescue and other transactions may lie in the presumption that a person has a reasonable excuse for taking a particular action or failing to take an action, and that the onus to prove unreasonableness is on the Pensions Regulator.

The new regime may also delay corporate transactions with further consideration and scrutiny of the rules being needed and advice to be taken on how to ensure compliance with the new regime and avoid criminal and civil penalties. Engagement with trustees on transactions may also take longer and so factoring early engagement in to a transaction will be important for timetable purposes.

The Pensions Regulator is expected to clarify many of the points discussed in this article later this year, but for now, those who could be affected would do well to keep themselves informed, to treat pension schemes equitably and with caution, to maintain good dialogue between pension trustees and the corporate decision-makers and to interact openly with the Pensions Regulator when required to do so.


This note reflects our opinion and views as of 13 September 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

Natalie Collier is an Associate in our Corporate team.

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