DWP proposes £1 million fine for “reckless” DB sponsors

26 Jun 2018

The Department for Work and Pensions plans to crank up the pressure on employers and trustees of underfunded DB schemes with increased fines, in a bid to strengthen the role of the regulator.

The proposals, revealed today on the DWP website as part of a consultation on the DB Whitepaper include a fine of up to £1m or criminal sanctions for employers  who fail to collaborate with The Pensions Regulator (TPR).

Esther McVey, secretary of state for Work and Pensions comments: “We need to ensure that the Defined Benefit system is tough enough to deal with abuses and continues to work in the best interests of those involved – for members and pensioners, for today’s workforce and for employers”

The proposals target DB schemes who demonstrate “reckless behaviour” and which fail to communicate corporate events which affect the scheme, such as the sale of part of their assets or senior appointments to the regulator. The category of corporate events” does currently not include any obligations for employers with regard to dividend payments in the context of an underfunded DB scheme.

If schemes fail to collaborate, they could face criminal sanctions, including a prison sentence of up to two years.  Under the 1995 Pensions Act, employers could currently face a fine of up to £50,000.

A TPR spokesperson welcomed the initial suggested reforms: “The proposal to enable us to apply a range of sanctions, from administrative penalties to high level fines and criminal charges, for different types of breaches, will provide TPR with a more flexible enforcement framework. It will also help act as a strong deterrent against risky and reckless behaviour which threatens the retirement incomes of workers.”

Malcolm McLean, senior consultant at Barnett Waddingham stresses that key terms of the proposals need to be more clearly defined.

“In particular the proposal to create a criminal offence of ‘reckless’ behaviour towards a pension scheme could prove problematic.  How will legislation define ‘recklessly’ and how will this be interpreted by the courts? It may take a couple of failed prosecutions before we find out” McLean warns.

Steve Webb, director of Policy at Royal London is also cautious: “Threatening to lock people up grabs the headlines which is why this is the third time that it has been announced.  But a criminal offence has a high burden of proof which could mean that the ‘bad guys’ simply get away with it.”

“Even if this measure is included in a Bill in next year’s Queen’s Speech it will be 2020 before it comes into effect and it is doubtful if anyone will ever be convicted.  In the meantime the government has made little progress on the more fruitful area of helping pension schemes to combine to achieve the benefits of scale.  It should be focusing on practical changes that could make a real difference rather than gesture announcements like this” he argues

DWP is now consulting among industry stakeholders for views to specify what behaviours and actions should lead to sanctions. Interested parties can respond through the DWP website until the 21st of August. The results will ultimately be published in a revised Defined Benefits Funding Code of Practice next year.

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