Practical tips for lenders when navigating the Pension Schemes Act 2021

The Pension Schemes Act 2021 is becoming an increasingly onerous framework to navigate for lenders, particularly with the increase in the buy-in and buyout of final salary or defined benefit (DB) schemes and the lending associated with that.

Traditionally, it has been the responsibility of a sponsoring employer to ensure that any loan it takes out does not materially adversely affect its pension scheme and, if it does, provide adequate mitigation for the scheme.

A failure by a sponsoring employer to do so could result in the sponsoring employer or companies connected and associated with it (and their officers) being subject to an exercise by the Pensions Regulator of its moral hazard powers.

Under these powers, the Pensions Regulator can impose a Contribution Notice requiring a company and its officers to make a payment to the pension scheme to address the detriment.

The significant change of position under the Pension Schemes Act 2021 (the Act) is that whilst it is still the case that the moral hazard powers cannot be exercised against a bank, the new criminal powers are exercisable against third parties (including banks and other lenders).

The criminal offence and civil penalties

Under the Act, it is a criminal offence for any person to:

• Engage in activity that has a materially detrimental impact on scheme benefits.
• Commit an act that prevents a pension scheme from recovering all or any part of their section 75 debt from the employer with the intention that the act would have that effect.

The offence can be committed by any “person” regardless of the connection or otherwise with the scheme or the employer and the offence applies to individuals and corporate entities including banks and other lenders.

The offence carries the risk of an unlimited fine and up to seven years in prison. There is also a civil penalty for the same offence, with a fine of up to £1 million.

Whilst banks and lenders will need to consider carefully the implications of the latest offences when providing funding to sponsors of DB schemes, they may draw comfort that the Pensions Regulator has said that it will not use it powers in a way that targets ordinary commercial activity and they will adopt a risk-based and proportionate approach.

Practical tips for lenders

The Pensions Regulator’s policy on criminal prosecution states that when considering the availability of the reasonable excuse defence, it will take into account:

• The extent to which communication and consultation with the trustees of the scheme took place before the “relevant act”.
• If there was a (material) detrimental impact on the scheme, the adequacy of any mitigation provided to offset it.

The lender should therefore make thorough enquiries with the borrower to evidence that the above steps have been taken wherever there is a final salary (DB) pension scheme in operation.

We have significance experience in this area and can support lenders through this due diligence process and where significant risk is identified we can make an application to the Pensions Regulator for Clearance prior to the transaction taking place.

For more information contact Céline Mather-Franks or Toby Larkham.