1st June 2018 Financial support directions and extent of TPR’s powers—‘Box Clever’

Granada UK Rental & Retail Ltd and others v Pensions Regulator [2018] UKUT 164 (TCC)

What are the practical implications of this case?

The Granada case, popularly known as ‘Box Clever’ after the name of the employer of the pension scheme, related to whether TPR had the power to issue a financial support direction against the Granada companies in relation to Box Clever being insufficiently resourced for its pension liabilities, and was heard by the Upper Tribunal (UT) in 2018.

The case is the first substantive court decision on the breadth and extent of the Regulator’s so-called ‘moral hazard’ powers—effectively its powers under sections 38 to 51 of the Pensions Act 2004 (PeA 2004) to impose liabilities in relation to a defined benefit pension scheme on parties other than the scheme’s actual employers. The UT had considered the issue earlier in the matter of Re the Bonas Group Pension Scheme [2011] UKUT (FS), (Michel Van de Wiele NV [2011] UKUT B3 (FS)), but this was a procedural hearing and the comments on the extent of the Regulator’s reach were technically obiter.

The statutory provisions relating to the moral hazard powers have been in force since April 2005, but the lack of regular usage or any litigation has left the industry and the Regulator uncertain of the Regulator’s reach. This decision, which has interpreted the range of the powers widely, will give the Regulator a great deal of confidence in its powers, and put it under yet further pressure to use them more regularly.

The judgment focused on the concept of ‘reasonableness’ which the legislation requires the Regulator to employ for use of moral hazard powers, and also the breadth of entities that may be ‘associated’ with the employer, and therefore within the scope of the powers. However, ITV, Granada’s current owner, has already confirmed its intention to appeal.

What was the background?

In 1999, Granada and Thorn set up a joint venture (JV) company, Box Clever, to run their television rental business. The JV borrowed money from a third party lender, charged against the business, and bought the assets from the two JV partners. The company set up a defined benefit pension scheme for the employees, transferring in from the JV partners for their future service with the company (past service liability stayed with the JV partners).

Despite financial assistance from the JV partners, in 2003 administrative receivers were appointed on behalf of the lenders, and the businesses sold. From this time, the JV partners had nothing further to do with the business.

Thorn applied for clearance to the Regulator in 2008—clearance if granted prevents the Regulator from using its powers. In 2009, the Regulator, as has been common Regulator practice, issued a non-binding letter of comfort that it would not use its powers in 2009.

In 2009, Granada, now owned by ITV, applied for clearance. At this stage, the Regulator held that it was incorrect in its earlier analysis and issued a financial support direction against various ITV/Granada companies in late 2009. ITV appealed on the grounds that:

  • the operation of the debenture with the lenders means that it is no longer ‘associated’ with Box Clever, as the lender has control
  • it is not ‘reasonable’ for the Regulator to issue against it because:
    • Granada and the ITV group lost financially on the joint venture
    • its actions were before the two-year limit for a financial support direction, and in factbefore PeA 2004 was passed
    • it behaved the same as Thorn against which the Regulator was not acting

 

What did the court decide?

The UT held that the Regulator’s financial support direction was appropriately issued.

It was held that the concept of being ‘associated’ was not based on the reality of actual control, but who had legal voting rights. So, even if the JV partners had ceded their power to vote shares to the lenders as a result of the terms of the debentures (a position the UT disputed), that did not stop them being associated.

The Regulator’s behaviour in issuing the financial support direction was considered reasonable. The list of factors to be taken into account for reasonableness for a financial support direction under PeA 2004, s 43(7) is not exhaustive, so other issues should be considered. Although Regulator guidance had focused on financial benefit and the Bonas case had suggested that this was of importance, the UT held that the Regulator’s powers were wider than that. The involvement of Granada in the business of Box Clever and, to some extent, the pension scheme, were just as relevant (possibly more so) as whether money had been taken out.

The retrospectivity of the Regulator’s actions was also considered reasonable. The UT noted that Parliament had chosen not to put temporal limits on what was taken into account for reasonableness. The retrospectivity prior to the date of the legislation was also considered but it was held that this was not unfair, despite the fact that all relevant facts were prior to the legislation. The UT did not give a great deal of detail on why this was the case, suggesting that this is a low hurdle for the Regulator.

The UT also held that there was no reason for the Regulator to treat the two JV partners the same, and that it was possible to take action against Granada but not Thorn. However, this part of the decision serves to underline that, although Thorn has not been the subject of Regulator action, the letters of comfort that have been commonly issued by the Regulator in recent years are not of value should the Regulator change its mind.

Rosalind Connor, Partner

This article was first published on Lexis®PSL Pensions on 1 June 2018. Click for a free trial of Lexis®PSL

The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. ARC Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.