Box Clever – Upper Tribunal sides with the Pensions Regulator
In what may be a significant development in the contest between ITV and the Pensions Regulator as to whether the latter can impose a Financial Support Direction on the former, the Upper Tribunal (Tax and Chancery Chamber) has ruled that the Regulator can. This is also the first ever substantive court case on the Regulator’s FSD powers under the Pensions Act 2004.
This dispute has been ongoing for a long time. Here is a (very) simplified summary of events:
- Box Clever was established by Granada (now part of the ITV group) and Thorn as a 50/50 joint venture of their television rental businesses in 1999/2000, toward the end of the era when people used to rent TVs from shops on the high street
- Box Clever paid £980m for these businesses, of which £600m was payable to Granada and £380m was payable to Thorn
- This was mostly financed by a loan from a now defunct German bank of £860m, secured on Box Clever’s assets in respect of the purchase price. Neither Granada nor Thorn was liable for the bank debt
- In October 2001, Box Clever established a DB pension scheme to provide pension benefits for its employees. The Box Clever companies (and not Granada or Thorn) were the sponsors of the Scheme and were liable to fund it
- Box Clever failed and the bank appointed receivers in 2003 who took over the Box Clever business and sold it, all the proceeds going to the bank as secured lender. Neither Granada nor Thorn had anything further to do with the Box Clever business after receivers were appointed
- According to figures provided by the pension trustee, at the time of the receiverships, the scheme had a funding deficit of some £25 million on a gilts-matching basis, which Box Clever was unable to meet due to its insolvency. The reported deficit has since grown to around £115 million
During all of this the Pensions Act 2004 was passed. This both established the Pensions Regulator and, from 6 April 2005, gave it the “moral hazard” power to issue “financial support directions” (FSDs).
The power to issue FSDs, along with its sister power to issue “contribution notices”, is controversial because they pierce the “corporate veil”. In the case of FSDs, what this means is that a company which is “associated” or “connected” (within the technical meaning of these phrases in the insolvency legislation) with an “insufficiently resourced” employer which sponsors a pension scheme may be on the receiving end of a Regulator direction to provide financial support to the scheme.
Crucially, the legislation states that the Regulator must be of the opinion that it is “reasonable” to issue an FSD. What reasonable means in this context has not been tested before, but after literally years of legal attrition it now has because the Regulator determined to issue an FSD to ITV in this case. It should be borne in mind that no public consideration has yet been given to how much financial support may be required if the FSD stands.
In these latest proceedings ITV issued a double-pronged challenge to the Regulator’s December 2011 decision to issue an FSD – lack of jurisdiction and unreasonableness:
Lack of jurisdiction
- ITV said that it was no longer “associated” or “connected” with Box Clever. But following a highly detailed analysis of the relevant insolvency legislation in the context of the complicated facts/events involved in this case, the Tribunal decided that there is sufficient association
- As the events concerned took place before the power to issue an FSD was enacted, ITV said that to issue an FSD would be to infringe the general presumption against retrospective legislation in English law. The Tribunal decided that this presumption was not engaged (nor did ITV’s arguments about human rights law being infringed help on this point)
- In 2009 the Regulator had issued a comfort letter to Carmelite (Thorn’s successor) that it would not go after them for an FSD. This was based on the Regulator’s understanding at the time of the insolvency law about association about which it later changed its mind. ITV argued that it was being discriminated against because it had no such comfort letter so, again, the Regulator had no jurisdiction to issue an FSD. The Tribunal rejected this argument, reasoning that there was enough objective justification for the different treatment
- ITV said that if the point of FSDs was to mitigate the moral hazard that the creation of the Pension Protection Fund would encourage employers into risky behaviour, then this could not apply in this case because the transactions under scrutiny took place before the PPF existed or was even contemplated. The Tribunal rejected this point in short order: the legislation itself says nothing about moral hazard and simply sets out some tests which have to be met before an FSD can be issued
Unreasonableness
ITV then advanced some arguments as to why, should the Regulator have jurisdiction, it was nevertheless not reasonable for an FSD to be issued. But the Tribunal sided with the Regulator for reasons including that:
- The joint venture was structured so that its shareholders extracted considerable cash from the business with no risk of recourse to their assets. They retained an ongoing interest in the upside while being insulated from any downside
- ITV had a strong connection and involvement with the scheme up to the point the receivers were appointed; a factor which is not diminished significantly by the fact that the practical connection with the scheme ceased at that point nor by the actions that the trustee (which had come in for some criticism for not winding the scheme up back in 2003) took after that time
In summing up, the Tribunal said that issuing an FSD (unlike a contribution notice) does not imply any criticism of the way the joint venture was structured, or of its commercial merits. Whilst there was some weight to ITV’s objections on grounds of retrospectivity, ITV had to take responsibility for the risks that the structure created and this outweighed the retrospectivity points.
Comment
We have waited a long time for the Regulator’s powers to be looked at by the courts and, frankly, we are not much wiser, not least because ITV has said that it intends to appeal.
If the Box Clever legal process stopped here we might be closer to understanding what reasonableness means, but it seems like it will be a long time yet before the dust does settle.
And a line-up of seven – 7! – silks and their supporting cast of juniors and solicitors must be generating a legal bill that is a substantial slice of the £100-odd million deficit. This might even be a factor in how the litigation is finally disposed of. Surely there must be a better way of doing these things?
GDPR comes into force
The General Data Protection Regulation (GDPR) comes into force tomorrow (25 May 2018) and will radically change data protection laws across the EU (including the UK, regardless of Brexit). The GDPR affects virtually every individual, business and entity across the EU and this includes trustees and managers of pension schemes.
By now trustees should have completed the necessary work to ensure that they are compliant, which is likely to have included the following:
- A “data mapping” exercise to establish who has access to and uses the scheme’s data
- A review of contracts held with service providers; and
- A review of the basis on which member data is held
Although the Information Commissioner’s Office has produced a general guide to the GDPR, it has yet to produce anything specific for pension schemes and trustees.
Comment
Most pension scheme trustees should be feeling a sense of relief by now that, having had this matter in hand for many months, they have good confidence to believe that they are GDPR-compliant in relation to their pension scheme data. But for those who are not so sure, this is not an issue that can be gently forgotten. Ignorance of the law is never a satisfactory defence and certainly not when there has been so much publicity about the issue across all walks of life, from the largest businesses in the land to the smallest of voluntary organisations, clubs and societies.
Data Protection Bill receives Royal Assent
The Data Protection Bill received Royal Assent on Wednesday afternoon.
The now Data Protection Act 2018 should not be confused with the General Data Protection Regulation – they are different legislative vehicles, although they cover similar ground and the Act supplements the GDPR in some areas.
The Act implements a commitment in the 2017 Conservative Party general election manifesto to repeal and replace the UK’s existing data protection laws to keep them up to date for the digital age in which ever increasing amounts of personal data are being processed. The four main matters provided for in the Act are general data processing, law enforcement data processing, data processing for national security purposes including processing by the intelligence services, and regulatory oversight and enforcement. It also replaces the Data Protection Act 1998.
Like the GDPR, the Act affects all aspects of modern life, not just pensions.
But as far as pensions are concerned, the main point of interest (other than compliance with the general provisions of the Act) is the specific exemption the Act allows for the processing of personal data without consent for occupational pensions where, broadly, such processing is necessary to make a determination about eligibility or benefits payable under an occupational pension scheme and the data being processed concerns the health of a parent, grandparent, great-grandparent or sibling of a member of the scheme.
There is also an exemption for the processing of personal data without consent which is necessary for an “insurance purpose”; is personal data revealing racial or ethnic origin, religious or philosophical beliefs or trade union membership, genetic data or data concerning health; and is for reasons of substantial public interest.
Comment
For the time being the Act will have little impact on pension schemes, but it is possible that once the UK leaves the EU it will be expanded so as to incorporate the GDPR and so become the principal UK legislative reference on data protection matters.
Healthcare company fined for misleading Regulator on auto-enrolment
In another success for the Pensions Regulator in the courts, Brighton magistrates have fined a healthcare company and its managing director, after they admitted misleading the Pensions Regulator about providing their staff with a workplace pension.
The case concerned Birmingham-based Crest Healthcare and its managing director and came to light after a whistleblower prompted an investigation.
The Regulator reports that in March 2016 the managing director submitted a declaration of compliance to it claiming that the company had complied with its auto-enrolment duties. However, on subsequent investigation, including the execution of a search warrant and interview of the managing director under caution, it became clear that the employer had not completed the setting up of a pension scheme, had not automatically enrolled any staff and had not written to its staff to tell them about automatic enrolment, as it was legally bound to do. And although pension contributions from some workers were deducted after the faulty declaration had been submitted, they were kept in the company’s bank account for more than eight months.
Crest Healthcare was fined £13,000 along with £3,404 costs and a £120 victim surcharge, whilst the managing director was fined £1,624 along with £3,404 costs and a £120 victim surcharge.
Comment
This is yet another example of the Regulator’s more muscular approach and is of note given that it took a whistleblower to alert it to the situation. In a separate blog, the Regulator reveals that it is receiving more than 80 reports every week from people who suspect employers are breaking the law on workplace pensions – and in the last 12 months those reports have directly led to around 600 employers being investigated for non-compliance. Could Crest Healthcare be just the tip of the iceberg?
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
