UK Proposal Would Make Pension Mismanagement a Crime


Allen Smith, J.D. By Allen Smith, J.D. March 25, 2019
UK Proposal Would Make Pension Mismanagement a Crime

​A proposal by the U.K. government to increase penalties and impose up to seven years in jail for bosses who recklessly risk pensions might prompt more employers to offer defined-contribution retirement plans instead of defined-benefits plans.

"Overall, the proposal seems likely to make defined-benefits plans even more disfavored," said David Powell, an attorney with Groom Law Group in Washington, D.C. The proposed criminal offenses may make it more difficult for pension schemes to recruit trustees, he noted.

If a plan sponsor becomes insolvent in the U.K., the plan goes into a fund known as the Pension Protection Fund, which provides most of the plan participants' pensions. The Pension Protection Fund imposes significant penalties for actions that weaken the pension plan after that, "so lawyers generally believe that a new law is not the answer," said Rosalind Connor, an attorney with ARC Pensions Law in London.

'Willful or Grossly Reckless Behavior'

The U.K. government in February recommended new criminal offenses for "willful or grossly reckless behavior" in relation to a defined-benefits scheme.

Reckless behavior might include putting pension scheme funds in an obviously risky investment, noted Simon McMenemy, an attorney with Ogletree Deakins in London. Or misbehavior might be increasing benefits for retired members without sufficient funds, jeopardizing the interests of current or future members of the pension fund.

Other behaviors that might be willful or reckless include chronic mismanagement of a business or allowing huge, unsustainable deficits to accrue.

Because such conduct would be a criminal offense, the legal standard of proof would be high under U.K. law, Connor noted. The offense would have to be proven beyond reasonable doubt. Nevertheless, "that may not be that much comfort to directors who are threatened with this," she added.

Pension trustees are generally more independent under U.K. law than are U.S. trustees and fiduciaries, Powell noted. Recent pension scandals in the U.K. have raised questions about whether the pension trustees should have been more proactive to ensure adequate funding of the pension during hard times.

One notorious case involved a company boss walking away from an underfunded pension at U.K. retail giant British Home Stores (BHS). The boss sold the company for a pound (approximately U.S. $1.31), leaving a 571-million-pound (approximately U.S. $750.81 million) deficit on the employees' pension fund. "As a result of this financial burden, BHS became insolvent the following year, leaving employees with less than their full entitlement to pension," McMenemy said. But the U.K. government's Pension Protection Fund provided them with some relief.

Increased Civil Penalties

The proposal calls for fines up to 1 million pounds (approximately U.S. $1.31 million) for:

  • Not complying with a financial support directive, which is an order by the U.K. Pensions Regulator for a company to pay into a plan sponsor that is underfunded.
  • Not providing a notification to the Pensions Regulator of plan sponsor activity where required by law.
  • Providing false or misleading information to plan trustees.

"There has been in recent years a tendency for plan sponsors to provide the information they are required to provide to trustees or the Pensions Regulator by law a bit late and not in a useful form," Connor said. The proposal "should certainly change behavior."

Fines currently are much lower—limited to 50,000 pounds (approximately U.S. $65,745)—because they were set by legislation 24 years ago. "Inflation has made them less impactful," she said.

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Advance Clearance May Be Sought More Frequently

If the proposal is adopted, plan sponsors are likely to become more engaged with pension scheme stakeholders, including not only the pension's trustees but the Pensions Regulator, noted Joel Eytle and Tamara Calvert, attorneys with DLA Piper in London.

The Pensions Regulator may provide advance clearance in relation to specific pension activity. By giving clearance, the Regulator confirms that it will not seek to use its powers to issue a financial support order in relation to a transaction, they explained.

Corporations used to get advance clearance on their activities more frequently than they do now. The number of clearance applications has fallen from 263 in the first year of being introduced in 2005-06 to just nine in 2015-16, they noted.

Status of Proposal

A first draft of a bill on the proposal was promised for late May, but, Connor observed, U.K. lawmaking currently is uncertain in light of negotiations over Brexit. "It may simply be that there isn't time to pass the law," she said.

Nevertheless, the Pensions Regulator on March 5 issued guidance providing that if an employer is unable to support its pension scheme, it should not pay shareholder dividends.


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