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UK Pensions Speedbrief: Box Clever - Upper Tribunal rules in favour of financial support direction against ITV

  • United Kingdom
  • Pensions

18-05-2018

On 18 May 2018, the Upper Tribunal published its decision in ITV plc and others v The Pensions Regulator and others, commonly known as the Box Clever case. The decision relates to the determination of the Pensions Regulator (TPR) to issue financial support directions (FSDs) to five companies in the ITV group (the Targets) in relation to the Box Clever Group Pension Scheme (the Scheme).

It is the first time the Upper Tribunal has heard in full an anti-avoidance case pursued by TPR. The Tribunal unanimously confirmed TPR’s decision that FSDs should be issued, requiring financial support for the Scheme to be put in place by the Targets within six months of issue.

Key Findings

  • TPR can consider actions and events that predate the relevant provisions of the Pensions Act 2004 (the Act);
  • The reasonableness test is a wide one and a purposive approach should be adopted;
  • Trustees are allowed to take account of the availability of  PPF support – although quite how far is still uncertain.

Background

The Box Clever group was created in 2000 as a joint venture under which the Granada group of companies (now part of ITV) and Thorn (the Shareholders) sold their existing TV rental businesses to the new group. Both Shareholders recognised at the time that the TV rental business was a declining market.

Box Clever borrowed £860million from Westdeutsche Landesbank to acquire the businesses from the Shareholders, with the loan being backed by security over Box Clever’s assets. Each Shareholder received substantial cash consideration for the sale of its business, in Granada’s case c.£530m, while also acquiring 50% of the equity in Box Clever. The transaction was structured such that Box Clever had no right of recourse to the Shareholders in the event that the business failed.

Originally, it had been intended only to offer a defined contribution pension arrangement to all staff, but in order to maintain good employee relations with those who were transferring from Granada and Thorn (both of which had defined benefit schemes), the Scheme was established in October 2001 with a defined benefit section for ex-Granada / Thorn staff. The Box Clever group companies were the employers of the Scheme (the Employers).

The Box Clever business struggled and administrative receivers were appointed in September 2003. The Scheme closed to accrual in December 2003, when it had a deficit on an ongoing basis of c.£25m. Over subsequent years, the deficit has grown significantly, with the estimated present deficit on a buy-out basis being around £115m.

The trustee of the Scheme (the Trustee) attempted over several years to negotiate financial support from ITV, but though some offers were made these were withdrawn and the Trustee, advised by Eversheds Sutherland, looked to TPR to use its anti-avoidance powers under the Act.

TPR issued warning notices to the Targets in September 2011 (with a look-back date of 31 December 2009). In December 2011, TPR’s Determinations Panel concluded that FSDs should be issued to the Targets. That determination was referred by the Targets to the Upper Tribunal. Following protracted litigation and a number of interlocutory hearings the reference was finally heard by the Upper Tribunal in early 2018.  The Tribunal was required to answer two key questions:

  • Was there jurisdiction to issue FSDs?
  • If so, was it reasonable to impose FSDs in the circumstances?

Jurisdiction

As regards jurisdiction, the Tribunal considered and ultimately rejected a number of arguments against TPR having the power to impose FSDs, including the following.

Retrospectivity

The Targets argued that the legislation did not allow TPR to impose FSDs on the basis of events all of which took place prior to the relevant provisions of the Act coming into force in April 2005. This would be to give the legislation retrospective effect, contrary to a basic presumption of statutory construction.

The Tribunal disagreed. In its view, the FSD provisions in the Act were not truly retrospective legislation, since they were concerned with a state of affairs at the look-back date (31 December 2009).  The mere fact that that state of affairs was the result of events and transactions that took place prior to the Act coming into force did not make the legislation retrospective in an objectionable sense. Further, there was nothing in the FSD provisions to indicate that Parliament intended to impose a cut-off date as regards the matters TPR may take into account. This is in contrast to the contribution notice regime (also part of TPR’s anti-avoidance powers), which requires an act or deliberate failure to act taking place after 27 April 2004.

Although the Tribunal had some sympathy with Targets’ arguments that they had been unable to seek clearance because the events in question predated the Act coming into force, this was viewed instead as relevant to the question of reasonableness.

Discrimination

The Targets also argued that it was discriminatory and unfair that TPR had only pursued Granada and not both Shareholders. The Tribunal rejected this argument. Whilst much of its reasoning turned on the specific facts of this case, it also made the more general point that TPR is not required to pursue every possible candidate for a FSD, and instead may be selective, provided that it has appropriate grounds for its choice of target.

Association

FSDs could only be issued to the Targets if they were “associated” with one of the Employers in the Scheme at the look-back date. The Targets accepted that prior to September 2003 they were associated with the Employers by virtue of their 50% shareholding in Box Clever, which met the statutory threshold. However, they argued that the appointment of administrative receivers broke the chain of control, since the security documents allowed the receivers to take over the voting rights attaching to their shareholding.

The Tribunal rejected these arguments and concluded that, on a proper construction of the contractual documentation, the mere fact of appointment of administrative receivers did not prevent the Targets from exercising the necessary control over the Employers.

Reasonableness

On the question of reasonableness, the Tribunal stated that the legislation should be given a purposive interpretation, having regard to its policy objective of creating a rescue framework for underfunded pension schemes by imposing new liabilities on those who have had the necessary degree of association or connection with a scheme at the relevant time. The provisions should not be restrictively interpreted.

The Tribunal emphasised in particular that the FSD regime is not fault-based (unlike the contribution notice regime).  It is concerned with responsibility, rather than blame.  Similarly, it was not essential for the issue of FSDs that there should have been “moral hazard” by the Targets, in the sense of relying on the PPF’s existence to enable the taking of unacceptable risks in relation to the Scheme.

The primary factors considered by the Tribunal in its assessment of reasonableness were as follows.

The relationship between the Targets and Employers

In this case, the Shareholders exercised control over the way in which the joint venture was structured, in particular debt was loaded onto Box Clever maximising the amount of cash to be extracted by the Shareholders.  Box Clever itself undertook no due diligence of its own, nor did it receive independent advice. It was clear also that the Shareholders exercised a significant degree of control over the operation of the joint venture and major business decisions, prior to the appointment of administrative receivers. The failure of the joint venture was found to be a direct result of the structure adopted by the Shareholders.

Benefits received directly or indirectly by the Targets from the Employers

The Tribunal did not find that Box Clever had overpaid for the acquisition of Granada’s business. However, the creation of Box Clever did still result in benefits to ITV, including the immediate cash obtained for a declining business and ongoing access to the potential upsides of the transaction, by virtue of the retained shareholding, whilst being protected from any downsides as a result of the way the transaction was structured.

The Targets’ connection with the Scheme

The Shareholders were found to be closely involved with the decision to set up the Scheme as a defined benefit arrangement, and the fact that the Scheme had originally only been intended to be a defined contribution arrangement was not material. Although the Shareholders had never promised to provide financial support to the Scheme, this was not a factor which weighed strongly against a decision to issue FSDs.

The Trustee’s actions relating to the Scheme

The Targets had  sought to counter-attack with criticisms of the Trustee. The Tribunal generally rejected the Targets’ various criticisms of the Trustee’s actions in respect of the Scheme and commented favourably on their persistence in pursuing the case. To the extent that any of these actions resulted in an increased deficit, this was a factor that might  be considered in deciding on the level of financial support to be provided and not a matter for the present hearing (which focused purely on whether FSDs should be issued at all).

The Targets also argued that, following the decision in ITS v Hope, it  had been impermissible for the Trustee to have taken into account the availability of PPF support when making decisions about the future operation of the Scheme (including, in particular, the decision to delay winding-up the Scheme). Again, the Tribunal disagreed ruling that ITS v Hope did not hold that a trustee could never take account of the PPF’s existence. Here the Trustee was keeping the Scheme going in order to allow it (either via negotiations or the issue of FSDs) to seek support for the Scheme from ITV, which (if obtained) would avoid the need for the Scheme to rely on the PPF. There was no suggestion from TPR or the PPF that the Trustee’s actions were in any way improper. This was in contrast to the position in ITS v Hope.

In concluding that it was reasonable to issue FSDs the Tribunal made clear that it did not take issue with the commercial merits or structure of the joint venture. However, it was right that the Targets take responsibility for risks to the Scheme that arose as a consequence of decisions taken by the Targets in relation to the Scheme and which resulted in substantial benefits to them.

Comment

The decision provides helpful authority that the FSD regime can take full regard of actions and events which predate the Act coming into force. However, given the time that has since passed, it remains to be seen whether TPR will in practice need to exercise its powers under the FSD regime in relation to events predating the Act. The delays in this case illustrate the cumbersome nature of the FSD process, which can be drawn out through extensive appeals, although it is also to be noted that having taken on the case, TPR has pursued it doggedly.

Also of interest is the wide and purposive approach taken by the Tribunal to issues of reasonableness. Trustees and members may be encouraged that it saw the primary purpose of this legislation being protection of benefits. The decision makes clear that targets will not be able to avoid responsibility for the consequences of their actions on the basis of narrow technical arguments, in circumstances where it is right that they be required to provide financial support.

The Tribunal’s comments in respect of ITS v Hope are perhaps of greatest significance for many trustees of schemes in deficit who worry how far they can take account of the PPF cover. Some commentators had read ITS v Hope  as suggesting that trustees should never justify their actions on the basis of PPF support. This decision provides some comfort that trustees are not expected to close their minds entirely to the existence of the PPF. However, in distinguishing ITS v Hope on the facts, the Tribunal did not lay down a universal test to be applied as to when and how far trustees can rely on the PPF in decision-making.

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