1. The Pensions Regulator acted correctly in issuing Financial Support Directions against the ITV group.
ITV has failed to persuade the Upper Tribunal that directions issued by the Pensions Regulator requiring ITV to provide financial support to the Box Clever pension scheme should be set aside.
2. Events taking place prior to the creation of the Pension Regulator or the Pension Protection Fund can be taken into account in the exercise of moral hazard powers.
Taking a purposive view of the relevant legislation and noting the Pensions Regulator's statutory objectives, the Upper Tribunal concluded that, in considering whether to exercise its "moral hazard" powers, the Regulator was entitled to take into account events which had taken place before the moral hazard regime existed.
3. Corporate practice that may have been reasonable and commercially sound at the time could still attract the exercise of the Pension Regulator's moral hazard powers
There was no finding of misconduct by ITV but that was not necessary for a Financial Support Direction to be issued. ITV's significant involvement with and control of Box Clever was sufficient to bring it close enough to the pension scheme such that it was reasonable to expect ITV to provide support to the scheme when Box Clever collapsed.
The Upper Tribunal concluded that, as ITV stood to gain if Box Clever had prospered, it should provide support to the scheme when the company failed.
Box Clever was created in 2000 as a 50:50 joint venture between Granada (which became ITV when it merged with Carlton) and Thorn (later the Carmelite Group) into which they put their respective TV rental businesses. Employees were transferred to the new entity and became members of a pension scheme set up in 2001. The scheme was sponsored by Box Clever and its subsidiaries.
Box Clever's business fared badly and by the end of 2003 administrative receivers were appointed. The pension scheme has around 2,800 members and a deficit of around £115 million.
After 2003 ITV and Carmelite had nothing to do with the Box Clever business. ITV unsuccessfully sought clearance from the Pensions Regulator (tPR) in relation to Box Clever. tPR did, however, issue a letter of comfort to Carmelite stating that Carmelite would not be pursued. In 2011, tPR issued Financial Support Directions (FSDs) against five ITV entities requiring them to provide support to the underfunded scheme.
Issues before the tribunal
ITV argued that tPR did not have jurisdiction to issue the FSDs because:
- The ITV entities 'targeted' by tPR were not connected to or associated with Box Clever as at 31 December 2009 (the date chosen for the purposes of the FSD by tPR).
- It was not permissible for tPR to rely on events which took place before the legislation which gave tPR the relevant powers (the Pensions Act 2004) had come into force; and
- The difference in treatment between ITV and Carmelite (which tPR did not pursue) was discriminatory.
ITV also argued that, in any event, it was not reasonable for it and its group entities to be the targets of Financial Support Directions.
Upper Tribunal's judgement
Associated / connected
The Upper Tribunal (UT) decided that the appointment of administrative receivers over the joint venture did not break the chain of control between ITV and Box Clever. Therefore, the ITV entities were properly subject to the FSDs.
The UT held that it was permissible in deciding whether to issue an FSD under the Pensions Act 2004 for tPR to rely on events which had taken place before that statute had come into force.
Although the "moral hazard" provisions in the Pensions Act were not expressed to be retrospective, the UT decided that the statute should be given a "purposive interpretation", reflecting Parliament's intention to create a moral hazard regime which was wide-ranging in its operation.
In so doing, the UT described an FSD as a "present solution to a present problem". Although an FSD altered existing rights and duties it was not (the UT thought) retrospective as it did not "upset or interfere with the terms of any of the transactions" in relation to Box Clever.
ITV had also argued that, should the FSD operate as tPR maintained, this would be in breach of the European Convention of Human Rights' Article 1 prohibition against a person's "peaceful enjoyment of his possessions". However, the UT found that the FSDs were proportionate and justified, and therefore not a breach of the Article.
The UT accepted that tPR had mistakenly decided not to pursue Carmelite. However, the UT found this did not prevent tPR from pursuing an FSD against ITV, not least because the Pension Protection Fund should not have to bear the additional strain by letting ITV off the hook as well.
Before the case reached the UT, ITV had (unsuccessfully) asked the Court of Appeal to strike out elements of tPR's case which alleged that ITV had been guilty of misconduct and that the price paid by Box Clever for the rental business was not market value.
In the event, the UT did not conclude that ITV had been guilty of any misconduct or that its commercial practices were in any way improper. However, this did not matter. For the UT, the key considerations were that the corporate structure adopted by ITV for the joint venture left Box Clever financially vulnerable to adverse movements in the market, while ITV was in a position to profit if the business prospered.
This is the first substantive UT decision on tPR's use of its moral hazard powers. The hearing lasted 2 weeks, involving (amongst others) 7 QCs.
The case demonstrates tPR's resolve to resist challenges to exercises of its moral hazard powers up the judicial ladder. As ITV have sought to appeal the UT's judgment, the saga is not over yet.
Since an object of the moral hazard regime introduced by the Pensions Act 2004 was to enable tPR to transcend the confines of corporate identities to reduce the burden on the Pension Protection Fund, the judgment is to a certain extent unsurprising.
However, corporates which may have used special purpose vehicles in relation to sponsors of defined benefit pension schemes will read this judgment with interest. Even though ITV could not have sought clearance from tPR when the relevant events took place (because the statutory framework did not then exist), the UT decided this was "clearly outweighed" by other factors.
In a significant recognition of tPR's authority and powers, the UT decided that the list of factors set out in the Pensions Act 2004, to which tPR must have regard when issuing FSDs, is not only not exhaustive, but those factors do not have to be present at all. tPR can take into account any factors and events which tPR considers relevant, including events which took place before the moral hazard regime was established.
The fact ITV might have lost out through the Box Clever endeavour and had not received any substantial benefit from the pension scheme's sponsor was not a bar to the issue of an FSD.
tPR was not under a duty to pursue every potential target of its moral hazard powers, so its decision not to pursue Carmelite did not assist ITV.
Corporate decisions and practice that may have been reasonable and commercially sound at the time they were taken or pursued could still attract the exercise of tPR's moral hazard powers.
tPR may take into account conduct stretching back an indefinite period when deciding whether to exercise its moral hazard powers.
Moral hazard powers may be exercised even where targets did not receive any significant benefits from being close to the scheme's sponsor but provided they stood to gain if the sponsor had prospered.
tPR has proved itself to be determined and willing to expend significant resources defending the exercise of its moral hazard powers.
If you have any questions on this article or the judgment, or would like to discuss any pensions issue arising from the case, do contact the authors or your usual pensions contact.