Box Clever judgment: Regulator can look back to events before moral hazard powers introduced
A tribunal has ruled that when deciding whether to issue a financial support direction (FSD) under its "moral hazard" powers, requiring a company associated with a scheme employer to put in place financial support for an underfunded scheme, the Pensions Regulator can take into account actions which were taken before the moral hazard powers became law.
The judgment is the latest development in long running litigation relating to the Box Clever pension scheme and has important wider implications regarding the approach the Pensions Regulator should take when deciding whether to issue a FSD. Broadly, a FSD can be issued against a company that is legally "associated" with a scheme employer if the scheme employer is a service company or if the statutory "insufficiently resourced" test is met. Broadly, this is designed to address the situation where the scheme employer itself has insufficient resources to fund the scheme, but an associated company does.
The background to the case involved a joint venture (JV) between Granada and its competitor Thorn whereby they combined their TV rental businesses into a JV, owned 50/50 by Granada and Thorn. The newly created Box Clever companies bought the businesses from Granada and Thorn for £980 million, funded by substantial borrowing, but within a few years Box Clever went bust, leaving a pension scheme with a substantial deficit. The Pensions Regulator sought to issue FSDs against companies on the Granada side (now part of the ITV group).
Key points from the judgment are:
- the Regulator was entitled to base a decision to issue a FSD entirely on events which occurred before the Regulator was given the statutory power to impose FSDs;
- there is no requirement for the Regulator to identify "morally hazardous" behaviour (ie people deliberately organising their affairs so as to shift the burden of providing pensions on to the PPF) in order to issue a FSD;
- regarding the question of whether it is reasonable to issue a FSD:
- the closeness of the relationship between the FSD target and the scheme employer, and how recently that relationship existed are key factors, more important than whether the FSD target received a benefit from the employer (though the issue of benefit can still be relevant to reasonableness);
- if the FSD target's level of control and influence over the employer has been very strong in the past, that may outweigh the fact that genuine control ceased some time ago due to the employer's insolvency;
- it can still be reasonable to issue a FSD even if there is no criticism of the way a transaction was structured or the way the business was operated;
- if a FSD target has established a business structure which leaves a scheme employer particularly vulnerable financially, it may still be reasonable to regard the FSD target as responsible for the situation even though the Regulator does not attach blame to the FSD target for acting in the way it did;
- if parties have consciously relied on the PPF's existence in deciding how to structure their affairs, that points strongly towards it being reasonable to issue an FSD. However, the absence of any deliberate reliance on the PPF is a neutral factor when considering reasonableness;
- the fact that a potential FSD target has substantial funds is a neutral factor when deciding whether to issue a FSD;
- if a target has control over a scheme employer, that makes it more likely that it will be reasonable to issue a FSD, compared to a situation where the FSD target is part of the same corporate group as the employer, but does not control it;
- if shareholders have undertaken to support a JV, that will be a strong pointer in favour of the issue of a FSD (though that was not the case for Box Clever); and
- if it can be shown that a very large part of a scheme's deficit can be attributed to the conduct of a scheme's trustees or employers which occurred after the potential FSD target ceased to have any effective control over the employer's business, that would be a strong factor against the issue of a FSD;
- the Granada companies legally still "controlled" the Box Clever companies even after the Box Clever companies went into administrative receivership and were therefore still legally their "associates" for the purposes of determining whether the Regulator could issue an FSD against them; and
- the Regulator was entitled to pursue companies on the Granada side of the JV even though it was not pursuing companies on the Thorn side (having previously issue a comfort letter on the point to the Thorn companies, apparently based on a mistaken view of the law).
Taking the above factors into account, the tribunal concluded that the Regulator had jurisdiction to issue a FSD against the Granada companies in relation to the Box Clever scheme, and that it would be reasonable for it to do so.