What could lie beneath the surface with S107?

We’ve all heard mention of Section 107, but what could it really mean? PLSA Chair Richard Butcher, takes a look at the implications of this law could be.

After what seemed an impossibly long incubation period the Pension Schemes Act 2021 has passed into law. Parliamentary jams caused by Brexit and COVID-19 not only contributed to the delay but also to its severe slimming down. None the less, what is there is major and, in one respect at least, could completely and utterly change the face of part of the pension landscape.

Whenever law is passed there is an element of celebratory back slapping, “we got it there”, and why not? There’s also always an element of spin, but, almost by definition with spin, there’s more to the truth than what is put in front of us. 

So it is with section 107. We are told new powers will allow the Regulator to pursue unscrupulous employers who deliberately underfund their DB schemes. And they will and that’s to be celebrated. Unfortunately, though, that isn’t the limit of the scope of s107. The real scope is far scarier. And if you’re reading this, it’s likely you have something to do with a DB pension scheme and, if you have something to do with a DB scheme, you’re probably within the scope of s107. Best you read on. 

S107 inserts two new parts into the Pensions Act 2004. The second of these is a new s58B. The title, which has no legal force, only just hints at the dangers that lurk beneath it “Offence of conduct risking accrued scheme benefits”. 

This isn’t a full legal analysis but in summary:

• If you act or engage (or fail to act or engage) in a course of conduct the result of which is:
• A material reduction in the likelihood of accrued DB benefits being paid;
• If you knew or ought to have known that act or conduct would have that effect; and
• If you had no reasonable excuse.

You could be bang to rights milord. With the result you are fined and or sent to prison for up to seven years. 

Wow. 

“If you knew or ought to have known”. To my mind that includes not just unscrupulous employers but also any trustee, adviser or service provider around the scheme. It could also include any number of parties who have nothing to do with the scheme (say a bank considering offering credit to the company or a trade union considering asking for a pay rise for its members). 

“Act or engage (or fail to act or engage) in a course of conduct”. That’s any course of conduct. Any course of conduct! Settling a valuation – too aggressively or not aggressively enough, paying a benefit, transferring to a consolidator, advising your client, not offering a line of credit … the list is endless, because it is “any conduct”.

In other words, pretty much anyone for doing pretty much anything. You do have two possible defences of course. 

Firstly, materiality – me deciding to shop at Tesco rather than Sainsbury is probably not material to either of their DB funding positions (although I would pass the conduct and knowledge tests). Provided, of course, I continue to buy my wine elsewhere.

Secondly, “reasonable excuse” – but I have no idea what that means. I can make some assumptions, but it doesn’t feel particularly robust building my risk mitigation on assumptions. In due course, of course, the courts will define this. But what a horrible way to operate meantime. Talk about the sword of Damocles. 

Am I losing sleep over this? In short – yes. This is a scary provision the result of which will be me keeping my schemes lawyers up all night as well. 

It's important to point out that the PLSA, and many other pension associations, raised our concerns in detail with the Minister for Pensions and the DWP in advance of the Bill becoming law. Disappointingly, they did not listen.

The regulator, however, has promised guidance and, another hopeful assumption here, I presume they don’t plan to send us to prison en-masse. I presume they can see the risks of over exercising their new power. But on that, we will have to wait and see. We will certainly engage with the consultation on that guidance. 

They say good things come to those that wait. S107 proves it’s not just good things.