Over 340 employers, including many universities and higher education institutions, participate in the Universities Superannuation Scheme for their academic staff.

Alongside, some of these employers sponsor a standalone defined benefit pension scheme for their non-academic staff.

New risks

From 1 October 2021 the Pensions Regulator (TPR) has new wide criminal powers to bring a prosecution against a person whose actions impact a defined benefit pension scheme. There are two offences:

• conduct risking accrued scheme benefits: where a person does something that detrimentally affects in a material way the likelihood of scheme benefits being received; and
• avoidance of an employer debt: where a person is a party to an act or omission which prevents recovery of a debt to the pension scheme, prevents it from becoming due, compromises it or reduces its amount.

There will be a defence where a person has a “reasonable excuse” for acting as they did. The penalties are:

• an unlimited fine; and/or
• imprisonment (term of up to 7 years).

TPR also has power to impose a civil fine of up to £1 million in respect of someone who engages in conduct falling within the scope of the criminal offences.

Extended contribution notice (CN) powers

In addition, the existing "moral hazard" powers TPR has had since 2004 – to issue a CN requiring sponsoring employers and associated persons/group companies to make contributions to a defined benefit pension scheme – are being widened. The tests that can trigger such regulatory intervention now include acts or omissions which: 

• materially reduce the amount which the pension scheme would be likely to recover on an insolvency (with the test done immediately before and after the act, assuming hypothetical insolvency); or
• materially reduce employer resources (which are calculated based on profitability) relative to the scheme’s funding deficit on a buy-out basis, i.e. the amount of additional funding that would be needed to buy-out members' benefits by the purchase of annuities from an insurance company.

Both are "snapshot" tests and TPR does not look at the person's underlying intent.

What does this mean for universities?

TPR says it does not plan to prosecute “ordinary commercial activity”, but the criminal powers are so broad that they raise the risk of TPR bringing prosecutions (with the benefit of hindsight) to deter behaviour it does not like. Employers in the higher education sector are not immune from this.

Activity potentially caught by the powers could include:

• internal restructurings; or
• granting security that would push the pension scheme down the creditor “pecking order” on employer insolvency. 

Where an employer proposes to grant security to the trustees of another pension scheme, such as the Universities Superannuation Scheme, that would not in and of itself be excluded from TPR scrutiny. It may also become necessary to formally notify a decision to grant or extend some types of security to TPR under changes to "notifiable events" regulations which had widely been expected to come into force earlier this year.

Where the pension scheme could be disadvantaged, TPR will expect mitigation (e.g. additional cash or security) to be provided. If full mitigation is not possible, TPR will expect the employer and, where relevant, its parent to consider whether there is a “viable alternative” to their plans.

TPR may be more inclined to issue a CN and/ or impose financial penalties rather than bring criminal prosecutions in all but the most extreme circumstances. It is likely to be much easier for it to do so under the new tests.

Practical implications

Some universities may not have had TPR's powers on their radar up to now, certainly outside the context of regulatory intervention in funding negotiations.

Ultimately, however, these changes present new risks for all employers, meaning there is now an increased need to give consideration to their defined benefit pension schemes on an ongoing basis, document their conclusions and engage with the trustees where relevant. This may require new governance processes and training for key personnel, so that circumstances which could potentially be problematic are picked up. Training will need to be kept up-to-date as TPR uses its new powers and practice develops.

As the criminal sanctions can apply to any person, universities also need to be aware that other third parties (such as lenders) will be considering the potential impact of any actions they may be taking in relation to their borrowers' schemes much more carefully than they have done in the past (e.g. decisions to lend or vary the terms of lending). They may have their own expectations as to the appropriate actions employers should be taking.