Pension Schemes Act 2021: Restructuring Consequences for Defined Benefit Pension Schemes

The Pensions Schemes Act 2021 introduced a number of changes to the UK's Pension regime.  Certain key provisions are expected to come into force in Autumn 2021.  Of particular note for restructuring professionals is the upcoming introduction of two new criminal offences in relation to certain defined benefit pension schemes ("Pension Schemes"):

• Avoidance of employer debt: where a person (with intention) acts or engages in a course of conduct that prevents the recovery of whole or part of employer Pension Scheme debt ("Debt"), prevents such Debt becoming due, compromises or otherwise settles that Debt or reduces the amount due.
• Conduct risking accrued scheme benefits: where a person acts or engages in a course of conduct that they knew or ought to have known would detrimentally affect in a material way the likelihood of accrued Pension Scheme benefits being received.

There will be a defence to any action if the act or intention is the result of a "reasonable excuse" and the offences do not apply to acts of insolvency practitioners in the conduct of their duties (but will apply in respect of any pre-appointment advice provided by e.g. a prospective administrator).

Each offence carries a penalty on conviction of seven years in prison and/or an unlimited fine or a new civil penalty of up to £1m.  N.B. the definition of 'person' is wide in scope and includes companies, directors, professional advisers and lenders.

Parties considering (or advising on) restructurings involving UK entities with Pension Scheme debt will need to have regard to the potential impact of the new offences when structuring and implementing any deal, including taking appropriate steps to mitigate any related risks.  In addition, it will become even more important to ensure that the reasons behind the restructuring and related discussions are fully documented, including to support any argument that there is a "reasonable excuse" for the particular course of action affecting the Pension Scheme.  The new offences are wide in scope, cannot be avoided by seeking clearance and are not subject to a limitation period.

The Pensions Regulator ("PR") recently issued a consultation on its draft policy on the prosecution and investigation of the new criminal offences.  The draft policy states that the PR intends to investigate and prosecute the new offences in line with Parliament's intention i.e. that the new offences are not "intended to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour".  In addition, the PR won't "usually" prosecute someone with a statutory defence to a material detriment contribution notice under the current regime.  The draft policy also includes guidance on what constitutes a "reasonable excuse":

• Advisers whose advice assisted or encouraged the offence will not be liable if they have a "reasonable excuse" even in circumstances where the principal is found liable.  The PR states "in most cases a professional person, acting in accordance with their professional duties, conduct, obligations and ethical standards applicable to the type of the advice being given, is likely to have a reasonable excuse".
• Proposing or acting in relation to a Part 26A Restructuring Plan could satisfy the "act" and "intention" elements of the new offences, but the PR is likely to consider the court sanctioning such a plan as a "reasonable excuse" (the PR notes, however, that this will not, impede them from issuing contribution notices or financial support directions).

In many restructuring situations, new money is required to rescue the company as a going concern.  It is common for lenders providing this type of financing to obtain first-ranking security to reflect the additional risk of providing financing in distressed situations.  This financing and associated security often has the short-term effect of adversely impacting existing secured parties, but is intended to have longer-term benefits e.g. facilitating a restructuring where the borrower can emerge on a much stronger footing.  While the draft policy states that arm's length business activity may fall within the "reasonable excuse" exception it states that such activity must be unrelated to the Pension Scheme and any detriment an incidental consequence.  As a starting point, lenders in distressed situations will need to be careful to ensure that any such financing is for the benefit of the business as a whole and does not disproportionately affect pension liabilities compared with other liabilities.  The draft policy does suggest that the PR will consider steps to mitigate the detriment when evaluating whether the relevant party has a "reasonable excuse" e.g. the lender seeking an alternative option which reduces harm to the Pension Scheme.  The draft policy is clear that counterparties will not be forced to proceed with an alternative that unreasonably disregards their own interests.  It is unclear to what extent the PR will expect alternatives to be explored and how it will assess the viability of these.  Another factor which may also be important is the identity of the proposed lender, post-Silentnight (a recent case in which the PR were critical of investors who purchased debt at a discount in order to enforce and obtain assets free of pension scheme liabilities).  Will the presence of an investor who bought into the debt at a discount impact the assessment of what constitutes a "reasonable excuse"?  The draft policy states that conduct is more likely to be scrutinised where significant financial gains have been "unreasonably" made to the detriment of the Pension Scheme.  This could well be something to consider for loan-to-own investors.

The draft policy adds that while not determinative in its own right, early engagement with pension trustees and the PR may have a bearing on whether an investigation is required.

The consultation on the draft policy closes on 22 April 2021.  It is hoped that the final policy might provide additional guidance on how these new offences will apply in practice.  At the very least, they give pause for thought in the context of considering any financial restructuring options.