TPR's criminal powers guidance 'vague and subjective', says Freshfields

The Pensions Regulator’s (TPR) draft guidance on new criminal offences could make it harder for schemes to be rescued and is “inherently vague and subjective” when it comes to explaining what a reasonable excuse is, according to Freshfields Bruckhaus Deringer.

Earlier in March, the regulator launched a consultation on its draft policy outlining how it will use its new criminal sanction powers introduced by the Pension Schemes Act 2021, which allow it to investigate and prosecute those who avoid employer debts to pension schemes or put savers’ pensions at risk.

As part of this draft guidance, TPR confirmed that the onus will be placed on the prosecution to prove that the accused did not have a “reasonable excuse”.

Freshfields raised concerns about TPR’s comments on mitigation, which noted that any mitigation provided to offset the detrimental impact would contribute to a person having reasonable excuse.

A blog post from the firm stated: “The question of adequacy of mitigation is inherently vague and subjective, as illustrated by TPR’s express expectation that mitigation will only be adequate where the scheme is treated 'fairly in relation to other parties' rather than where the actual detriment caused is addressed.

“Finally, in a distress scenario, it may not be possible to fully mitigate any potential detriment.”

Further concerns were raised about TPR’s expectation that schemes be treated “fairly” by different parties, which Freshfields said did not take into account the interests of different parties.

The firm continued: “There is an express recognition that TPR won’t 'generally' expect someone to pursue an alternative that means unreasonably disregarding their own interests – such as a lender declining to lend additional funds where it reasonably considers there to be a high risk of default or that it will recover more of its existing lending by default now than extending lending terms further.

“However, a key concern will be the extent to which TPR will expect alternatives to be explored and what view it takes on viability and the reasonableness of a lender’s decisions. Will TPR generally accept the commercial judgments made by parties in good faith on those issues or will it seek to impose its own view?”

Freshfields argued that this failure to offer comfort to parties such as specialist distress lenders could make scheme rescues less likely as the lenders could become reluctant to lend to, or acquire debt owed by, groups with UK defined benefit pension schemes.

The firm also raised concerns that TPR could adopt a more expansive approach to prosecution in response to public outcry, that potential prosecutors of the criminal offences other than TPR had not confirmed that they would stick by the same principles outlined by the regulator and the potentially broad definition of a ‘moral hazard’.

It also argued that there was very little substance included in the draft guidance about how TPR would approach the 'avoidance of employer debt' criminal offence.

Freshfields said TPR had clearly tried to take on board the concerns raised by the pensions industry and sought to frame the guidance in a way that would provide “some degree of comfort”, noting that the regulator had sought to reassure that its proposed new powers were “not intended to achieve a fundamental change in commercial norms or accepted standards of corporate behaviour”.

The firm concluded: “Hopefully feedback from the consultation will help TPR to refine the draft guidance to provide additional comfort and further reduce the risk that, rather than protecting pension schemes, the new criminal offences worsen their position by making it harder for their sponsoring employers to do business and/or to be rescued if they become distressed.”

Responding to the post, a TPR spokesperson said: “As our draft policy highlights, the intent of the new criminal offences is not to change commercial norms or accepted standards of corporate behaviour. Rather, it is to tackle the more serious examples of intentional or reckless conduct that puts members’ savings at risk; and strengthen the deterrent and punishment for that behaviour.

"Our approach to these new offences will take account of the policy intent, all relevant facts and circumstances, as well as the response to them and the reasons for actions taken.

“We recognise some restructuring situations events move at a pace and decisions need to be made quickly. 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.”

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