Last Friday the Upper Tribunal (Tax and Chancery Chamber) (the Upper Tribunal) issued its long awaited judgment in Box Clever.
The Upper Tribunal has held that the Pensions Regulator (the Regulator) was right to pursue the use of its Financial Support Direction (FSD) power against ITV in relation to the Box Clever Group Pension Scheme (the Box Clever Scheme).
A quick reminder…
One of the two key anti-avoidance powers the Regulator can use against employers of defined benefits schemes is an FSD. An FSD requires the target to put in place financial support for the scheme.
The Target can be both the employer of the scheme and/or any party who is “connected with or an associate of” that employer. To issue an FSD, the Regulator must be of the view that the scheme’s employer is either a service company or “insufficiently resourced” and that it is “reasonable” to expect the target to provide support for the scheme.
The decision on whether to issue an FSD lies with the Regulator’s Determinations Panel (the Determination Panel). Any target of an FSD has the right to refer the Determination Panel’s determination to the Upper Tribunal.
Box Clever was formed in 2000 as a joint venture between the TV rental businesses of Granada (now ITV) and Thorn (now Carmelite). Respective employees were transferred to the new company and enrolled in the Box Clever Scheme.
Ultimately, the joint venture failed, and administrative receivers were appointed. The administrators were able to sell the business but there was no residual value left for unsecured creditors, which included the Box Clever Scheme.
In September 2011, the Regulator issued a warning notice to five companies in the ITV Group (the Targets), which by then had acquired the Granada group of companies. In December 2011, the Regulator issued the Targets with an FSD. This decision was made on the basis that:
- the Targets were “associated” with the Box Clever Scheme’s participating employers by virtue of their control of the voting power in Box Clever; and
- it was an appropriate and reasonable response to issue the FSD given the value of the proceeds that had been received by the Targets from the sale of the Granada business to the joint venture (N.B. the Determinations Panel made a point of emphasising that its FSD jurisdiction was not fault-based, i.e. there was no need for any evidence of misconduct to be found on the part of the Targets in order to issue the FSD).
The Targets referred the Determination Panel’s determination to the Upper Tribunal.
Following some to-ing and fro-ing between the Upper Tribunal and the Court of Appeal, the Upper Tribunal has now ruled that it was reasonable for the Regulator to order ITV to provide financial support for the Box Clever Scheme. In particular, the judges noted that:
“By their choice of structure for the Joint Venture, the Shareholders (i.e. Granada and Thorn) extracted considerable cash from the business with no risk of recourse to their assets. They retained an ongoing interest in the merged business with the possibility of further value being generated if the business was successful, but without having to bear any responsibility of the business, whose strategy they continued to determine, subsequently failed.”
Although this decision is very fact specific, the Upper Tribunal’s judgment does provide some useful points of clarification which will be of wider interest to employees and trustees of defined benefit schemes. In particular, it confirms that:
- The Regulator can take into account events which occurred prior to 2005[ii] when considering whether to issue FSDs;
- The FSD regime is not fault based and so does not require criticism or blame to be found against the targets; it is instead a regime based on responsibility; and
- Assessing what is “reasonable” will require an assessment of all the relevant facts, with the relationship between the targets and the pension scheme as the starting point. An FSD may still be issued against a target even if it has not received any substantial benefit from its relationship with the pension scheme’s sponsoring employer.
ITV has announced its intention to appeal the Tribunal’s decision.