The Upper Tribunal has issued its interim decision in an appeal from a decision by the Determinations Panel of the Pensions Regulator to impose a contribution notice (CN) on two director shareholders requiring them to pay a total of £1m into the company's defined benefit pension scheme.  Among the questions considered by the Upper Tribunal were whether a higher amount could be required from the director shareholders and whether a new CN could also be issued against another shareholder.  The Upper Tribunal held that, as part of its statutory role to determine whether the Determinations Panel had taken appropriate action, it had jurisdiction to increase the amount required under the CNs.  However, it did not have the power to require the Panel to impose a CN on another shareholder because the Panel was now time barred and the Tribunal could not make an order beyond the authority of the Panel.  The Pensions Regulator has lodged an appeal to the Northern Ireland Court of Appeal on this point.  The case is now expected to proceed to a full hearing before the Upper Tribunal.  It will be interesting to see if the parties will settle but on the facts, it is likely that if the Regulator does settle, it will be for a higher amount than the £1m already imposed and more likely for a significant amount of the total buy-out deficit in the scheme (estimated between £10m and £17m).


In April 2010, the Panel issued a CN against two director shareholders, Mr Desmond and Mr Gordon, requiring them to pay £900,000 and £100,000 respectively into the Desmond & Sons Ltd Pensions & Life Assurance Scheme, a defined benefit pension scheme.

Broadly, the Pensions Regulator has powers under the Pensions Act 2004 to impose a CN on a company or an individual requiring them to pay the trustees of a defined benefit scheme a specified sum of money if it considers that the company or individual acted, or failed to act, in a way which prevented the employer debt in the scheme from arising or from being recovered.

For Northern Ireland, the powers of the Regulator to issue a CN are contained in separate legislation to the 2004 Act but the provisions are materially the same.  


The company, a clothing manufacturer, relied on M&S as its only customer to sustain its operations in both Northern Ireland and overseas. The company was given 24 months' notice that M&S would only continue to trade with the overseas operations.

The company's shareholders agreed to place the company into a Members Voluntary Liquidation ("MVL"). By doing so, the Company could, under a loophole in legislation applicable to Northern Ireland, be treated as an insolvent company for the purposes of calculating the statutory debt, the effect of which was that, under legislation as it stood at the time, the debt was calculated on a basis known as the minimum funding requirement (MFR), rather than the buyout basis used for solvent companies. The MFR was the statutory basis for funding defined benefit schemes in England and Wales until it was replaced with the current scheme-specific funding regime under the Pensions Act 2004. A debt on an MFR basis (which requires that a scheme's assets must cover its liabilities, assessed on a prescribed set of actuarial assumptions) generally produces a much lower debt figure than that calculated on the buy-out basis (which looks at the notional cost to the scheme of buying annuities for scheme members from an insurance company).

The Regulator issued the CN against the two director shareholders on the grounds that they had structured the MVL so as to enhance shareholder value to the detriment of the pension scheme.  The shareholders of the Company had received dividends totalling £17.2 million from the MVL.  The scheme, however, as it was fully funded on an MFR basis, got nothing from the Company by way of an employer debt payment and was forced to enter the Financial Assistance Scheme with a buy-out deficit of £10.9 million. The Regulator found that the director shareholders were aware that under new legislation that was planned to come into force in due course, the MVL loophole would be closed and that one of the main drivers for them behind the MVL was to prevent an employer debt from arising on the buy-out basis when the new legislation took effect. The director shareholders had misled the trustees about the MVL, and had in fact suggested to the trustees that the Scheme was going to continue, so preventing the trustees from negotiating with the company for additional funding for the scheme.

The director shareholders appealed against the use of the CNs to the Upper Tribunal.  The Scheme trustees also lodged a reference to the Tribunal, arguing, among other things, that the CN imposed on the director shareholders should have been for the full amount of the Scheme's buy-out basis and that a CN should also have been issued against Mrs Desmond, another shareholder of the company. The Regulator then filed two statements of case in relation to the references by the director shareholders and the Scheme trustees, broadly supporting the trustees' position.

The director shareholders and Mrs Desmond also made various interim applications, asking for parts of the Regulator's statement of case and the trustees' references to be struck out. They argued that:

  • Mrs Desmond should not be added to the CN as no Panel determination had been made against her and any claim against her was time barred anyway.
  • The Upper Tribunal could only "support" the Panel's determination, and could not increase the sum issued under the CN.
  • Allegations made before the Upper Tribunal were not referred to in the Panel's original determination, and therefore could not now be argued on appeal.
  • The Panel had relied on a series of acts surrounding the MVL when making its determination, whereas the legislation only refers to a single act.


The Upper Tribunal held that:

  • Mrs Desmond could not be added to the CN as any claim against Mrs Desmond was time barred. As the role of the Upper Tribunal is to determine whether the Panel took appropriate action, the Upper Tribunal could not make an order beyond the authority of the Panel. Although the Upper Tribunal did not decide whether it could have made an order if the claim was not time barred, it suggested it may have had sufficient jurisdiction.
  • The Upper Tribunal had jurisdiction to increase the sum requested by the CN as part of its statutory role to determine whether the Panel had taken appropriate action.
  • As it was for the Upper Tribunal to reach its own conclusions, either party could raise new arguments or reintroduce points argued in the initial determination, provided that any new factual matters introduced before the Upper Tribunal were confined to the existing case and did not relate to a new cause of action.
  • It was for the Upper Tribunal to determine whether a series of different events could constitute a single "act" for the purposes of the legislation, and therefore the series of actions that led to the company entering MVL could be considered.


When the Regulator imposed a CN on the Belgian company, Michel Van De Wiele in the case of Bonas in April 2010, it was believed to be the Regulator's first ever CN since it acquired its anti-avoidance powers in April 2005.  The Panel's determination to impose the CNs in this case in fact predates the CNs imposed in the Bonas case.  However, for various reasons, the publication of the Upper Tribunal's interim decision was delayed until 8 March 2012, which prompted the Regulator to also postpone the publication of the Panel's' determination until 15 March 2012.

It remains to be seen whether the parties will settle out of Court as was done in Bonas.  There, Michel Van De Wiele settled with the Regulator for a CN of a considerably smaller sum (£60k) than the £5m originally imposed following a finding at an interlocutory hearing by the Upper Tribunal that the amount of the CN was unreasonable.  Given that there is no suggestion from the Tribunal in this case that the amount of the CN imposed was unreasonable, and the Tribunal's findings that it can increase the amount of the CN, if the Regulator does settle it is likely to be for a higher amount representing a significant proportion of the buy-out deficit in the scheme.

That said, this case is another example of the Pensions Regulator using its sanction making powers to boost an insolvency recovery beyond that which was legislated for by Parliament.  Recovery under the Northern Irish legislation was limited to the MFR debt (in this case nil) and the Pensions Regulator used its sanction power to increase that to something which may ultimately be the buy out level.  Whether that was reasonable in the current case (perhaps based on the alleged misleading of the trustees) is not something that we can comment on at this stage – the case was on an interim point and reasonableness was not fully discussed.  However, what is apparent is that the Regulator has the will to use its powers in this way, which is in contrast to comments made during Bloom & Others v The Pensions Regulator (Nortel, Re) [2010] EWHC 3010 (Ch), (Nortel) case where the Regulator stated that situations where it would use its "super-priority" sanctions to recover more than would be recovered under the unsecured employer debt would be highly unusual.  This case will give no comfort to lenders wondering what the Regulator's policy will be in the implementation of its post-Nortel powers.

Desmond and others v The Pensions Regulator and Garvin Trustees Ltd (Reference: FS/2010/0010 and FS/2010/0011).