Box Clever: the Regulator breathes a sigh of relief

The Upper Tribunal (Tax and Chancery) has handed down a landmark decision in the ‘Box Clever’ case, ITV PLC v The Pensions Regulator [2018] UKUT 0164 (TCC). The judgment not only upholds the Regulator’s issue of financial support directions in the present case, but emphasises the width of its powers under the so-called ‘moral hazard’ regime.

Financial support directions – a reminder

The Pensions Regulator (TPR) has extensive ‘moral hazard’ powers in relation to defined benefit occupational pension schemes, which allow it to pursue target companies who have been connected or associated with employers under a pension scheme. One of these powers is to issue a Financial Support Direction (FSD). This requires the recipient to ensure that financial support is put in place for an underfunded scheme, and can be imposed on associated or connected companies of any scheme employer which is either a “service company” or “insufficiently resourced”. An employer will be insufficiently resourced where it has insufficient assets to meet 50% of the estimated buy-out deficit in the scheme and other companies in the group are able to meet the difference. TPR must consider it reasonable, in all the circumstances of the case, for the FSD to be issued.

Box Clever: the original decision

As long ago as December 2011, TPR issued an FSD against five companies in the ITV group in relation to the Box Clever Group Pension Scheme. Box Clever was a joint venture arrangement set up in 1999 by Granada (now ITV) and Thorn and financed by significant borrowing, none of which was secured on assets of Granada or Thorn. Granada received around £500m as a result of the transaction. The Box Clever Group went into receivership in 2003 and in 2004, Granada became part of ITV. The current deficit in the Scheme is estimated at £115m.

The Determinations Panel of TPR held that it was reasonable for TPR to issue FSDs taking into account events which happened between 1999 and 2003, even though neither TPR nor the moral hazard legislation existed during that period. Moreover, although ITV was not created until 2004, it stood in the shoes of Granada as the ultimate parent company of the group which benefited from the formation of Box Clever, making it reasonable to issue FSDs against it.

The Tribunal’s verdict

It took over 6 years for ITV’s appeal to be heard by the Upper Tribunal (following several years’ worth of further litigation about procedural aspects of the case). The Tribunal held that it was reasonable for TPR to have issued the FSDs. In particular, the Tribunal decided that “in choosing to adopt the structure they did…the Shareholders extracted considerable cash from the business with no risk of recourse to their assets.”

The Tribunal agreed with TPR’s approach to taking into account events which took place before April 2005. It held that the purpose of the moral hazard legislation was to create a rescue framework for pension schemes in deficit by imposing new liabilities on those who were associated or connected with the scheme at the relevant time. In most cases, the causes of a scheme’s weakness could be traced back to a host of different decisions taken by the employer or trustees over many years and it would defeat the objective of the legislation if TPR could not take into account events which took place before the legislation came into force.

Other issues raised

Importantly, the Tribunal took an equally broad-brush approach to factors, listed in the legislation, which TPR will consider when deciding on whether it is reasonable to issue an FSD. These include the benefits received by target companies, their relationship with the scheme employer, and their involvement with the scheme. In the Tribunal’s view, such terms were deliberately drawn widely and should be interpreted in the same way. TPR had a general discretion to consider the circumstances of the case before it and balance all relevant facts to reach a conclusion, starting with the relationship between the target companies and the scheme.

The Tribunal rejected arguments that FSDs could only be issued to target companies that had acted irresponsibly. The FSD regime had been designed as a “no fault” regime.

The target companies were ordered to put financial support for the Scheme in place within six months.

Conclusions

TPR has recently come under heavy fire for its role in certain high profile pensions cases, and is likely to view this decision with some relief. The Tribunal’s judgment is lengthy and detailed and, in relation to key aspects of the case, supports the approach taken by TPR and upheld by the Determinations Panel.

We understand that ITV are planning to appeal.

The case can be found here.