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26 Jun 2019

Court of Appeal provides guidance on the Pensions Regulator’s powers to issue a Financial Support Direction

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Court of Appeal rejects ITV’s appeal against Financial Support Direction

In December 2001, the Pensions Regulator issued a Financial Support Direction (FSD) to certain companies in the ITV group (the Target) requesting that they provide support to the Box Clever Group Pension Scheme (the Scheme). The Scheme has an estimated deficit of £115 million. The Target appealed to the Upper Tribunal who upheld the FSD. The Target then appealed to the Court of Appeal.

Background

ITV and Thorn set up a joint venture of their rental businesses in 2000, often referred to as Box Clever. Box Clever established the Scheme, which was a defined benefit pension scheme, for certain of its employees in 2001. The Box Clever employers (Employers) subsequently became insolvent leaving the Scheme in deficit.

The Pensions Act 2004 gave the Pensions Regulator the power to issue FSDs to companies that were ‘connected or associated’ with an employer of a defined benefit pension scheme requiring them to provide financial support to such a scheme.

The grounds of appeal

Retrospectivity

Before an FSD can be imposed, the legislation requires that the Pensions Regulator considers it ‘reasonable’ to impose an FSD. It goes on to provide a non-exhaustive list of considerations to take into account for these purposes.

At the time that both the joint venture and the Scheme were established, the Pensions Act 2004 had not come into existence. The factors that the Pensions Regulator took into account in determining that imposing an FSD was reasonable therefore pre-dated the Pensions Regulator’s powers. The Target argued that an FSD could not be imposed in respect of events that pre-dated the Pensions Regulator’s power.

Connected or associated’

A further requirement relevant in this case was that, for an FSD to be imposed on the Target, the Target had to be ‘connected or associated’ with the Employers. This test was satisfied if the relevant Target exercised control of one third or more of the voting rights of the Employers. In the Box Clever case, the Target argued, amongst other matters, that they lost the ability to control the voting power of the Employers once an Administrative Receiver had been appointed, as the Administrative Receiver took over control of the Employers.

Reasonableness

The Target also argued that the reasonableness requirement was not met as entering into the joint venture was a reasonable commercial decision.

The Court of Appeal’s decision

The appeal was dismissed and the FSD was upheld. The Court’s findings on the grounds of appeal were as follows:

Retrospectivity

The Pensions Act 2004 does not impose a time limit in relation to the matters which the Pensions Regulator can take into account when determining whether it is reasonable to impost an FSD. Reasonableness may require an examination of the relationship between the target and the scheme employer from its inception. The Pensions Regulator could, therefore, look at matters before the Pensions Act 2004 came into force in determining whether it is reasonable to issue an FSD.

‘Connected or associated’

The Court held that, under the relevant legislation, the Target would be associated with an employer of the Scheme if it could control one third or more of the voting power of the employer. Whilst the Administrative Receivers, following their appointment, were likely to have decided how the employers’ shares should be voted, that was “neither here nor there. The Administrative Receiver would have been voting in [the employer’s] name and on its behalf. It was the employer ‘that was entitled to exercise the voting power...

The person registered as the holder of the shares carrying one third or more of the votes (in this case the Target) is to be considered as having the requisite control and would therefore satisfy the ‘connected and associated’ test.

Reasonableness

The Court highlighted that whether it is reasonable to issue an FSD is a matter for the Pensions Regulator. Whilst the legislation lists factors to be taken into account, the list is not exhaustive and it is for the Pensions Regulator to determine the weight to be given to each factor; they do not have to be given equal weight.

The Court confirmed that the Tribunal below had not erred in its decision that the reasonableness test had been satisfied. It also reaffirmed the Tribunal’s decision that there is a distinction between fault on the one hand and responsibility on the other. The Court of Appeal confirmed that “…even though a target was not at fault legally or ethically, it nevertheless bears a high degree of responsibility for an insufficiency of funding”.

Comment

This decision provides useful guidance on the Court’s interpretation of the extent of the Pensions Regulator’s FSD powers. Employers should be aware that the Court has confirmed that the FSD regime has, to a certain extent, a retrospective effect. Transactions and commercial arrangements that pre-date the Pensions Act 2004 may still be relevant in determining whether it is reasonable for the Pensions Regulator to impose an FSD. The Court has also reiterated the point that the Pensions Regulator does not need to find there is fault on the part of a target before an FSD can be issued.

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