The U.K. government has promised tougher jail sentences of up to seven years for executives who mismanage company pension schemes.
The move is designed to ensure company bosses who allow deficits to escalate to unsustainable levels or who endanger their workers’ savings through chronic mismanagement face the full force of the law.
“For too long the reckless few playing fast and loose with people’s futures have got away scot-free,” said Amber Rudd MP, secretary of state for work and pensions. “Acts of astonishing arrogance and abandon punished only with fines, barely denting bosses’ bank balances.”
As such, “for the first time, we’re going to make wilful or reckless behaviour relating to pensions a criminal offence,” she added.
The failures of high-street fashion retailer BHS, with a £500 million deficit (U.S. $641 million) in its pension scheme, and the outsourcing group, Carillion, with an even bigger shortfall, prompted the government to conduct a review of pension law last June. On 11 February, the government published its response.
If Members of Parliament (MPs) back Rudd’s proposals, the government will introduce two new criminal offences to prevent and penalise mismanagement of pension schemes.
The first would target individuals who “wilfully or recklessly” mishandle pension schemes through chronic mismanagement of a business—allowing huge unsustainable deficits to build up—or by taking huge investment risks. The offence would introduce a new custodial sentence of up to seven years’ imprisonment or an unlimited fine.
The second, which would also attract an unlimited fine but no prison time, would target individuals who fail to comply with a “Contribution Notice.” These are issued by The Pensions Regulator and require that person to pay a specified amount of money into the pension scheme. The government will also introduce a new civil penalty of up to £1 million (U.S. $1.3 million) for this offence.
The rules, however, will apply only to defined benefit schemes—not defined contribution schemes—and since auto-enrolment came into effect, whereby all U.K. employers must offer an employee pension scheme, most new schemes are the latter.
“As CEOs have the final say [on how schemes are funded], it seems far more logical to incentivise them to fund the main pension scheme properly by requiring them to be members, rather than threatening the trustees with a punishment that could be near impossible to enforce.”
Joanne Horton, Professor of Accounting, WBS
The scandals at BHS and Carillion, in particular, not only highlighted the relative ease that companies can run up huge pension deficits, but also the reluctance—and powerlessness—of the regulator to proactively intervene to force directors to top them up or enforce a sufficient penalty against them when they refuse to do so.
For example, Sir Philip Green managed to cut a deal with the Pensions Regulator whereby, in exchange for an action against him to be dropped, he paid only £363 million (U.S. $464.5 million) toward the £571 million (U.S. $731 million) pension blackhole he left in BHS when he sold it for £1 (U.S. $1.3) in 2015. Some 19,000 current and former workers saw their company pension benefits slashed by 12 percent as a result of Green saving himself £208 million (U.S. $266 million).
Meanwhile, Carillion workers were members of a defined-benefit pension scheme, which promised a guaranteed income once they retired. The pension scheme, however, was nearly £1 billion (U.S. $1.3 billion) in deficit when the firm collapsed in January last year. Around 28,000 workers will lose at least 10 percent of their annual pension.
Fortunately for them, the company’s directors did not lose out, as they were members of another executive pension scheme that appeared to be well-funded prior to Carillion going into liquidation.
The government’s proposals have already received cross-party support. Frank Field MP, chair of the work and pensions select committee, said Rudd “deserves huge credit for stepping in to sort this so early in her tenure, where others have so long failed to act.”
Field wants the new law to be applied retrospectively. “Most people would be aghast to hear that this law doesn’t already exist. How could it ever have been legal for company bosses to recklessly or wilfully risk their workers’ pensions?”
He added: “Retrospection in the law is usually to be avoided, and for good reason. But the actions of greedy bosses like those at BHS and Carillion have torn apart thousands of people’s plans for the future. In such exceptional circumstances, shouldn’t the long arm of the law be able to reach into the past to gain justice for those who lost so much?”
Separately, research by Warwick Business School (WBS) released this week found that forcing bosses to join the same pension plan as their staff could protect defined benefit pension schemes as directors would stand to lose the most if they were allowed to run into deficit.
Joanne Horton, professor of accounting at WBS, said: “If Carillion CEO Richard Howson and his executives had been members of the company’s main pension plan, the outcome might have been different. If they had paid more into the main pension plan alongside their employees, instead of having their own executive pension scheme, they would have stood to lose the most when the company collapsed.”
“As CEOs have the final say [on how schemes are funded], it seems far more logical to incentivise them to fund the main pension scheme properly by requiring them to be members, rather than threatening the trustees with a punishment that could be near impossible to enforce,” she adds.