Aproposal by the U.K. government to increase penalties and impose up to seven years in jail for bosses who recklessly risk pensions might prompt more employers to offer defined-contribution retirement plans instead of defined-benefits plans.

“Overall, the proposal seems likely to make defined-benefits plans even more disfavored,” said David Powell, an attorney with Groom Law Group in Washington, D.C. The proposed criminal offenses may make it more difficult for pension schemes to recruit trustees, he noted.

If a plan sponsor becomes insolvent in the U.K., the plan goes into a fund known as the Pension Protection Fund, which provides most of the plan participants’ pensions. The Pension Protection Fund imposes significant penalties for actions that weaken the pension plan after that, “so lawyers generally believe that a new law is not the answer,” said Rosalind Connor, an attorney with ARC Pensions Law in London.

‘Willful or Grossly Reckless Behavior’

The U.K. government in February recommended new criminal offenses for “willful or grossly reckless behavior” in relation to a defined-benefits scheme.

Reckless behavior might include putting pension scheme funds in an obviously risky investment, noted Simon McMenemy, an attorney with Ogletree Deakins in London. Or misbehavior might be increasing benefits for retired members without sufficient funds, jeopardizing the interests of current or future members of the pension fund.

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