In the case of Pelgrave v The Pensions Regulator, the Upper Tribunal has increased the liability imposed on an individual by a contribution notice (CN) under the Regulator’s “moral hazard” powers. The Regulator may issue a CN imposing liability on a person who is a party to an act or failure to act which the Regulator considers has detrimentally affected in a material way the likelihood of accrued scheme benefits being received.
In the case in question the Regulator’s Determinations Panel had decided that a CN in the sum of £180,218.50 plus an adjustment for the passage of time should be issued to Ms Pelgrave (AP). AP referred the decision to the Upper Tribunal arguing that no CN should be imposed at all. The Regulator argued that the amount should be increased.
Events leading to the CN
At the relevant time, AP had been one of two directors of DFL and had held a 25% shareholding in DFL’s parent company. DFL was the principal and sole employer of a defined benefit scheme which had a significant deficit. From 2011-12 onwards the amount of annual deficit repair contributions had significantly reduced compared to previous years. The schedule of contributions provided for the deficit to be repaired over a period of 25 years and was significantly “back end loaded” (ie relied on contributions in later years being much higher than in earlier years).
In 2016 AP sold her shares in DFL’s parent. This was financed by DFL drawing down on its existing banking facility and lending the funds to another group company (“Pink”) which then financed the purchase of shares in DFL. Pink did not have substantial assets of its own. The structure of the group meant that Pink’s ability to repay the loan turned entirely on the future fortunes of DFL. At the time the loan was made, DFL was loss making. Thus although neutral in accounting terms, the reality of the situation was that the transaction significantly impaired DFL’s ability to fund the scheme. AP by her own admission did not consider the impact of the transaction on the scheme.
The Upper Tribunal’s decision
The Upper Tribunal (UT) decided that the amount payable under the CN should be increased to £245,749. There are a number of points in the UT’s decision that are worth noting due to their wider relevance.
The UT rejected AP’s argument that a person is only a party to an act for CN purposes if the person procured or was a decision-maker in relation to the act. The UT held that “party to” should bear its ordinary meaning which the Oxford English Dictionary defines as “a person who is concerned in an action or affair; a participant; an accessory.”
When looking at whether an act or omission has affected the likelihood of accrued scheme benefits being received, the UT confirmed that the mere fact that a transaction may be neutral in accounting terms does not mean that it has had no impact on the likelihood of accrued benefits being received. The correct test is to consider the real world impact including the ability of a party to repay money that it owes.
Although the scheme was significantly in deficit, at the point of the UT’s decision the principal employer was not insolvent and the scheme continued to provide benefits in full. The UT considered that it may still be reasonable to issue a CN in such circumstances.
The Regulator had originally sought a CN against AP in the sum of £360,000 on a joint liability basis with another individual, CW, meaning that the Regulator could have pursued either individual for the full £360,000. However, CW had entered into a settlement agreement with the Regulator before a CN was issued. The Regulator’s Determinations Panel determined that the correct and reasonable figure for a CN in relation to AP on a sole liability basis was £180,000 (ie half the original figure sought by the Regulator). This recognised that, as a result of the settlement agreement with CW, the Regulator would not be able to recover any further funds from CW, and AP would have no right of indemnity from CW for a proportionate share of the joint and several liability. The UT did not consider that the shift in award from sole liability to joint and several justified the reduction in the contribution notice figure claimed from AP. However, it considered that a figure of £245,749 was appropriate taking into account the financial benefit to A from the transaction after allowing for the fact that she had paid tax on the sale proceeds and also gifted some of the sale proceeds to her children (in accordance with a non-legally binding agreement that AP had reached with her parents when they gifted their shares to her).
Our thoughts
It is relatively unusual for a case relating to a contribution notice to progress to the Upper Tribunal, so this case provides a useful insight into the tribunal’s approach. However, it should be noted that the contribution notice regime allows the Pensions Regulator (and consequently the Upper Tribunal if a case is referred to it) a broad discretion to determine what is reasonable in the particular circumstances of the case.
