TPR’s criminal powers ‘pose risks’ to universities

More than 340 employers participate in the USS, which has had a troubled recent history following the contentious conclusion of its 2020 valuation.

Trade union members have walked out on strike on several occasions, with another nationwide strike ballot scheduled for September. Unions are unhappy with reform proposals agreed between the USS trustee and Universities UK, the group that represents USS employers, which pledged greater covenant support and a moratorium on scheme exits in exchange for a comprehensive governance review.

Recent monitoring reports have shown the scheme in a significantly improved financial position, which the union has taken as proof that it was right to question the timing of the 2020 valuation and to object to the proposals stemming from it.

Universities and their bankers are discussing the impact of refinancing, especially on the back of new monitoring and reporting requirements imposed by USS. This is the area more likely to attract scrutiny from both the regulator and the USS trustee

Nick Stones, Pinsent Masons

Now, a blog post from law firm Addleshaw Goddard has suggested that reform proposals and changes made by employers could attract unwelcome attention from the regulator under its new criminal powers and contribution notice regime.

The new powers

TPR’s controversial new powers came into force in October 2021, to much criticism from the industry. Experts said the wording had been drafted much too broadly and that, whatever the regulator’s assurances that it would not look to disrupt ordinary business activity, the drafting gives it the power to intervene in a vast number of areas.

There are two principal offences under the new powers: risking accrued scheme benefits and avoidance of employer debts. These can be punished by an unlimited fine and/or a prison sentence of up to seven years.

TPR may also impose a civil fine of up to £1mn on anyone whose conduct falls within the scope of the two offences.

The blog post explained that TPR’s contribution notice powers are likewise being expanded. The tests that would trigger the issuance of a contribution notice now include acts or omissions that “materially reduce” the amount the pension scheme would be likely to recover on insolvency, or that materially reduce employer resources relative to the scheme’s funding position on a buyout basis.

The blog added that, though the watchdog has said it does not intend to obstruct “ordinary commercial activity”, 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”.

Such activity might extend to internal restructurings, or granting security that would move the pension scheme down the creditor “pecking order” in the event of employer insolvency.

“Where an employer proposes to grant security to the trustees of another pension scheme, such as the USS, that would not in and of itself be excluded from TPR scrutiny,” the blog explained. 

“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 potentially lose out, the regulator “will expect mitigation”, it continued, such as additional cash or security. And where full mitigation is not possible, it will expect the employer and any parent company “to consider whether there is a ‘viable alternative’ to their plans”.

“TPR may be more inclined to issue a [contribution notice] 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,” the blog stated.

Universities must tackle ‘new risks’

Addleshaw Goddard warned that 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”, and added that the changes “present new risks to all employers”.

Accounting for the risks “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”, it continued.

“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 (eg, decisions to lend or vary the terms of lending),” the law firm said.

“They may have their own expectations as to the appropriate actions employers should be taking.”

Pinsent Masons pensions partner Nick Stones concurred with the suggestion that the problem arises from the wide drafting of the new criminal powers in particular, telling Pensions Expert: “The headlines focus on criminal sanctions, but the changes also include wider civil powers. Criminality being established requires a higher burden of proof on the prosecutor, in this case TPR.

“I suspect the main use will be the wider civil powers and we will see a more vocal, but ultimately a regulatory regime not dissimilar to what we have now.”

Stones said that employers making changes to ensure they have “the optimum pensions vehicle for future accrual” were “very unlikely to be caught” by the new powers. Closing to new members and creating new pension structures for new employees “should be fine”.

But in the context of the USS, he added: “Universities and their bankers are discussing the impact of refinancing, especially on the back of new monitoring and reporting requirements imposed by USS. This is the area more likely to attract scrutiny from both the regulator and the USS trustee.”

Taylor Wessing pensions partner Anna Taylor noted, however, that TPR “is already pretty involved in USS valuations, and even published an FAQ document on the most recent process, so it’s unlikely that the criminal sanctions powers would be used in this context”. 

She explained: “TPR’s main concern will be protecting accrued benefits and reducing the likelihood of calls on the [Pension Protection Fund], and it has to balance these objectives against minimising impact on the sustainable growth of employers.

“Arguably, the reduction to future service benefits that has been agreed will make it more likely that accrued benefits will be received, because what is accruing now ought to be more affordable, and this is why the changes were made.

“If TPR were sufficiently concerned about funding levels in the USS, then it would be more likely to use one of its other powers, such as to set contribution rates or even to freeze the scheme so that no further benefits could accrue. As far as we’re aware, TPR has to date never used either of these powers in relation to any scheme, and they remain weapons in its arsenal.”

A UUK spokesperson told Pensions Expert: “UUK is aware that the USS trustee has a close dialogue with TPR on all USS matters as you would expect in the case of one of the largest DB schemes in the UK. 

“At UUK we also have periodic meetings with the regulator, which provide a helpful opportunity to discuss both scheme and higher education sector issues.”