A Stronger UK Pensions Regulator: Risks for Directors and Officers

In recent months, deficits in defined benefit pension schemes have become front-page news in the UK. The UK Government has responded by issuing proposals to enhance powers of The Pensions Regulator. If passed, these will increase the risk of non-compliance for directors and officers of employers who provided such schemes and will lead to further scrutiny as to how D&O insurance can mitigate such risks.

The Pensions Regulator is the UK regulator of work-based pensions. It is a public body established by the UK Government.

The Pensions Regulator's powers fall into three categories. Firstly, gathering information, including by issuing information-gathering “section 72” notices pursuant to the Pensions Act 2004. Secondly, regulatory and enforcement action, including the ability to impose civil and criminal sanctions. Thirdly, anti-avoidance action - this allows The Pensions Regulator to demand that an employer pay money into a scheme, either by issuing a contribution notice or a financial support direction.

In March 2018, the UK Government published a series of proposals aimed at protecting defined benefit pension schemes. They include broader powers for The Pensions Regulator and new sanctions for non-compliant activities by company directors.

Amongst the key proposals are the introduction of the following changes, intended to broaden the scope of The Pension Regulator's existing powers:

• The introduction of “punitive fines” that can be imposed against those who deliberately put a defined benefit scheme at risk. The new fines are intended to extend to individual company directors, not just employers. It is not yet known what the level of fines will be, nor whether any upper limit to the fines will be introduced. The UK Government expects the penalty will be linked to the contribution notice. This suggests that fines could be significant.
• The introduction of a new criminal offence, designed to sanction “wilful or grossly reckless” behaviour by directors (and connected persons) in relation to a defined benefit scheme. Again, little is known about the scope of this new offence, although what has been made clear is that the offence is intended to be targeted at company directors, rather than employers. The new offence is notably broader in scope than existing criminal offences under existing workplace pensions legislation.
• Broader powers to facilitate information gathering. These could include a standalone power for The Pensions Regulator to require individuals to attend interviews. This would likely apply to company directors in addition to those who manage defined benefit schemes.

Defined benefit schemes are no longer the dominant form by which pension provision is made by UK employers in the private sector. However, they still account for £1.5 trillion assets and around 10.5 million scheme members in the UK, with scheme payments predicted to peak around 2020 to 2030. It is clear that protection of defined benefit schemes is seen as a key issue by the UK Government, given the public outcry when such schemes fail, and the financial consequences for members of such schemes.

Enforcement Action

Company directors who do not take their obligations seriously in respect of defined benefit schemes are likely to be subject of regulatory investigations, and potentially enforcement action. This is consistent with The Pensions Regulator's recent approach. During the last financial year, it investigated over 132,000 cases, issued more than 36,000 fines and exercised its enforcement powers in over 500 cases, including pursuing criminal proceedings against:

1. The chairman of a brewing company for failing to provide financial information as to the company's defined benefit scheme.
2. The directors of a recruitment company for impersonating their temporary employees to opt them out of workplace pension schemes.
3. The managing director of a healthcare company for misleading The Pensions Regulator as to the provision of a workplace pension scheme for the company's employees.
4. The managing director of a bus company for deliberately avoiding given its staff workplace pensions.

The Pensions Regulator has also stepped in following the collapse of a number of well-known UK companies, including in the construction and retail industries. It has taken action against individuals associated with those companies who failed to provide information about their pension schemes. It has agreed settlements with other individuals after issuing contribution notices demanding they pay money into those schemes.

Impact on Directors and Officers and their Insurers

Recent cases such as these demonstrate The Pensions Regulator's willingness to take enforcement action against the directors and officers of companies in addition to the trustees of pension schemes. The costs of defending proceedings brought by The Pensions Regulator can be substantial. As many involve the exercise of its criminal powers, the consequences for individuals can be severe.

As pressure on scheme funding continues to increase, management of defined benefit pension schemes is likely to remain a key topic of boardroom conversation. With an ageing population, and volatile market conditions, as the UK transitions to a post-Brexit trading environment, it is likely that we will continue to see defined benefit scheme deficits (possibly alongside company failures).

Directors should be aware of the increased level of scrutiny they may face personally, in light of the new sanctions being proposed to ensure adequate management of defined benefit schemes. Indeed, the new proposals for punitive fines and the criminal offence for wilful or grossly reckless behaviour are being specifically targeted at directors and officers, not just employers and pension trustees.

The proposed changes to the law and increased public awareness may well lead to Insurers scrutinising companies with large defined benefit schemes, particularly those in deficit and which are operating in challenging trading conditions. Consideration will need to be given as to the scope of cover afforded for actions brought by The Pensions Regulator and how they fall for consideration under conventional D&O liability insurance policies and potentially the interaction with any coverage afforded under pension trustee liability insurance.

This article first appeared in The D&O Diary on 20 September 2018