The Upper Tribunal has decided in favour of the Pensions Regulator (TPR) in its long-running battle with ITV over the Box Clever Group Pension Scheme, in a case which has helpfully clarified the scope of TPR's anti-avoidance powers.
What was the dispute about?
Box Clever was established in 2000 when Granada (now ITV) agreed to combine its TV rental business with the TV rental business of its competitor, Thorn (now Carmelite). Box Clever paid £980m for the businesses – £600m to Granada and £380m to Thorn – which was funded by a loan from Westdeutsche Landesbank.
Shortly after the joint venture was set up, Box Clever established the Scheme for the benefit of its employees. The only "employers" of the Scheme who were directly liable for its funding were the Box Clever group of companies. Neither Granada nor Thorn were employers.
The Box Clever business was not successful; it fell behind with bank repayments and administrative receivers were appointed over the group in 2003.
In 2009, based on a mistake as to the application of the financial support direction (FSD) regime, TPR issued a "letter of comfort" to Carmelite confirming that it would not pursue Carmelite for a FSD in relation to its role in Box Clever. ITV applied to TPR for clearance in relation to its role in 2009. This was rejected and TPR subsequently issued an FSD to ITV and four other group companies (the "Targets").
When may TPR issue an FSD?
Broadly, TPR may only issue an FSD if an employer of a DB Scheme was either a 'service company' or 'insufficiently resourced' at the 'relevant time', the target was connected or associated with the employer at the 'relevant time', and it is reasonable to impose an FSD against the target. The 'relevant time' is a time determined by TPR that falls within the period of 2 years ending when TPR issues a warning notice (known as the "look-back period").
What were the issues?
The issues in front of the Tribunal broadly fell into two categories:
- Whether TPR had jurisdiction to issue an FSD against the Targets; and
- Whether it was "reasonable" for TPR to issue an FSD against the Targets.
What did the Tribunal decide?
The Tribunal held that TPR had the jurisdiction to issue an FSD and that it was reasonable in the circumstances for TPR to issue an FSD to the Targets. The Tribunal gave the following explanation for its decision:
Appointment of administrative receivers did not break chain of control
The Targets had argued that, under the terms of the debenture with the bank, the bank had taken over the voting rights in Box Clever when administrative receivers were appointed. This, it was argued, broke the "chain of control" such that the Targets were not connected / associated with the Box Clever group at the relevant time.
The Tribunal disagreed, holding that under the terms of the debenture the voting rights did not vest in the Bank automatically on the appointment of administrative receivers, and remained under the control of Box Clever until notice was given to it by the Bank. As no effective notice was given, the appointment of administrative receivers did not break the chain of control and so the Targets were properly connected / associated with the Box Clever group at the relevant time.
FSD legislation was not retrospective
The Targets had argued that TPR had no jurisdiction to issue an FSD because all of the facts regarding the conduct of the Targets that would be considered in any assessment of reasonableness related to events which occurred before the FSD legislation came into force on 6 April 2005.
The Tribunal rejected this argument, holding that the FSD legislation was not retrospective since it provided a "present solution to a present problem; namely an employer being insufficiently resourced relative to its pension liabilities". Further, the Tribunal noted that Parliament had, in fact, specifically addressed the temporal application of FSD legislation by limiting the power of TPR to issue an FSD to the situation where a target was connected or associated with the employer within the within a 2-year "look-back period". As such, the Tribunal considered that Parliament had chosen "to impose the temporal cut-off date by reference to the existence of the necessary connection or association between the potential target and the employer rather than by reference to when any or all of the factors making it reasonable to issue the FSD occurred".
Decision not to pursue Carmelite not discriminatory
The Targets had argued that it was discriminatory to pursue the Targets when TPR was not able to issue an FSD to Carmelite because of the mistakenly issued comfort letter.
The Tribunal concluded that the mistake in law which prompted the issue of the comfort letter to Carmelite should "not be replicated for the benefit of ITV". Further, the Tribunal decided that TPR's decision not to withdraw the comfort letter but still pursue ITV for an FSD was objectively justifiable.
FSD regime did not require morally hazardous behaviour
The Targets had argued that TPR had no jurisdiction to issue an FSD because the conduct of the Targets did not generate the "moral hazard" that the FSD regime is designed to prevent.
The Tribunal rejected this argument, noting that there is no requirement in FSD legislation for the conduct of the potential targets to be "morally hazardous", and that there was no basis for such a requirement to be implied into the legislation.
In deciding that it was reasonable for TPR to issue an FSD to the Targets, the UT emphasised that the FSD jurisdiction is not fault based and was not established by reference to specific acts or omissions. This is in contrast to TPR's other main anti-avoidance power to issue a contribution notice, which is based on morally hazardous behaviour. The Tribunal did not seek to attribute blame to the Targets as to how Box Clever was structured and the business was run, but emphasised the important distinction between "blame" and "responsibility".
Relevant to deciding that it was reasonable for TPR to issue an FSD was the fact that the Targets had extracted considerable cash from the Box Clever business (£600m). The Targets also retained an on-going interest in the business with the possibility of further value being generated if the business was successful, but without having to bear any responsibility if it failed.
The Targets had also argued that it would not be reasonable for them to be responsible for funding liabilities of the Scheme that accrued after the appointment of administrative receivers in 2003. The Targets pointed out that the trustee had delayed a decision to wind-up the Scheme because of a desire to bring the Scheme within scope of the PPF. This decision, it was argued, increased the Scheme's liabilities. The Targets argued that this was not a legitimate reason to continue the Scheme, relying on Independent Trustee Services v Hope. The Tribunal rejected this, finding that it was reasonable for the trustee to take into account the availability of the PPF in deciding to delay the winding up of the Scheme.
The Tribunal did acknowledge that a significant factor against the issue of an FSD was the fact that the Targets could not have known at the time that the Box Clever joint venture was established that further liabilities may be imposed on them via an FSD, and that they had no opportunity to seek clearance. However, the Tribunal ultimately concluded that the factors pointing in favour of issuing an FSD "clearly outweigh … the strong points that the Targets make on retrospectivity".
This is the first time that the Upper Tribunal has fully considered FSDs and the case has clarified a number aspects of the regime – particularly in confirming that it is not fault based and in relation to retrospectivity.
The Tribunal has also clarified the scope of the Independent Trustee Services v Hope decision by confirming that there may be circumstances in which it is perfectly legitimate for trustees to take the existence of the PPF into account in their decision-making, and that the question will need to be considered on a case-by-case basis.
However, this is may not be the end of the Box Clever saga, as ITV has indicated that it will appeal the Upper Tribunal's decision.