The trustees of Box Clever's defined benefit pension scheme came under scrutiny for their decision-making during the course of an Upper Tribunal hearing on the company's collapse.
A significant Upper Tribunal judgment was handed down on Friday 18 May 2018. The Tribunal sanctioned The Pensions Regulator (TPR) taking a tough stance and imposing a Financial Support Direction (FSD) against ITV, which is now required to provide support for the Box Clever pension scheme. Box Clever was a joint venture between Granada (subsequently taken over by ITV) and Thorn, and its defined benefit pension scheme has 2,800 members, and a deficit of around £115 million. TPR was successful in the Upper Tribunal because the Tribunal agreed with him on three important issues: jurisdiction, retrospectivity and reasonableness, i.e. found that TPR had the power to impose the FSDs in the first place, that the FSDs could be issued for events which had pre-dated the statutory introduction of the power, and that TPR was inherently reasonable to deploy its powers. Box Clever Trustees Limited, who were the trustees of the scheme, were also a party to the proceedings and joined as an interested party.
This was a complex case where the trustees of (failed TV rental business) Box Clever's defined benefit pension scheme came under scrutiny for their decision-making during the course of an Upper Tribunal hearing on the company's collapse. Box Clever was established in 2000, and formed part of a joint venture between Granada and Thorn. It was originally envisaged that all transferring staff would transfer their accrued benefits into the new Box Clever pension scheme, so that members' benefits would be higher, being based on continuous service, and final pensionable salary when leaving Box Clever.
However, after the actuarial valuations of the liabilities and assets to be transferred took longer to agree than planned, it became clear that the scheme would be left with a funding shortfall if it accepted the transfers. In the expectation that the valuation would be resolved, the Tribunal heard that the scheme had been established by a deed for past and future service, despite not yet having the assets to fund these promises.
In addition to the issue of the transfer values being insufficient, the Box Clever pension scheme (which was by this point already paying retiring members the promised continuous service benefits in the expectation that an agreement would be reached) was on its way to a deficit of £18.2m by 2002.
The Trustees turned down the transfer values on offer from the two legacy schemes and took it upon themselves to find a top-up arrangement. Past service benefits for staff would remain in the Granada and Thorn schemes, with an allowance for increases in salary in line with the retail price index capped at 5 per cent. Any salary increases above RPI, which the sponsor at the time said would be rare, would be shouldered by the Box Clever pension scheme, the Tribunal heard. However, ITV’s lawyers had suggested the Trustees should have considered the cost of providing these benefits on a winding-up basis too, as well as possible salary rises significantly above inflation.
Moreover, when the operating companies of Box Clever went into receivership in 2003, the receivers awarded large staff pay rises, which further worsened the funding position. It also became clear that Trustees would be unable to trigger a winding-up debt, as the holding company for the Box Clever group of companies was technically not insolvent, even though it had no assets and owed secured debt to the banks that financed the joint venture. When the scheme was finally able to enter into a Pension Protection Fund (PPF) assessment period, ITV questioned why the Box Clever Trustees had not closed the scheme to future accrual as soon as the operating companies entered receivership.
The Tribunal heard that although the Trustees had the power to trigger a PPF-assessment period in 2007, this was not actually used until 2014, as the Trustees had delayed the winding up and/or putting the scheme into the PPF in order to try and secure 100% of members' benefits on an ongoing basis. During this seven year period the number of pensioners eligible for full benefits in the PPF (subject to the cap) increased from 476 to 1,146. ITV felt that a "reverse moral hazard" had arisen, whereby ITV was expected to pick up the bill for benefits accrued while the Trustees failed to act because they knew the PPF was there to pick up the pieces if things went wrong.
TPR argued that the case had been reduced to a "competition of undesirability" with ITV believing it was more reasonable to expect pensioners to receive reduced benefits under the PPF, than for ITV to put additional funding into the scheme.
What does this judgment mean?
- The Tribunal’s judgment clarifies a number of points of law regarding how and when TPR can use its FSD powers. In particular, the Tribunal agreed with TPR’s position on the following points.
- Retrospective use – The purpose of the FSD regime is to provide a rescue framework for pension schemes in deficit. TPR could not meet its objectives if it could not take into account events which occurred prior to the Pensions Act 2004 coming into force – as, for example, many scheme and company structures were created prior to 2004.
- Fault – As the regime is not fault-based, it does not require criticism or blame to be found against the targets for their conduct in respect of the pension scheme. It is instead a regime based on responsibility – in this case ITV and Thorn chose the structure of the joint venture, and should therefore bear appropriate responsibility for the risks.
- Reasonableness – The "reasonableness" in issuing an FSD is assessed by balancing all the relevant facts to reach a conclusion, with the relationship between the targets and the pension scheme as the starting point. In making this assessment, terms from the legislation such as “benefit”, “relationship with the employer” and “involvement with the scheme” should be given a wide interpretation. An FSD may still be issued against a target even if it has not received any substantial benefit from its relationship with the pension scheme’s sponsoring employer, although in this case the Tribunal found that ITV had received valuable benefit from the creation of the employer.
Wider significance of the Case
Ultimately the Box Clever judgment addresses the issue of how TPR applies its powers and regulates to meet its statutory objectives of protecting members' benefits and reducing the risk of calls on the PPF. With the recent scandals involving Carillion, BHS and others this case can be seen as a real and tangible desire to support TPR in promoting and improving employer compliance with pension funding obligations (whilst at the same time recognising the need to minimise any adverse impact on the sustainable growth of employers). The judgment is also indicative of the fact that trustees' actions are becoming increasingly more scrutinised and tested. It remains to be seen whether the case will lead to an increase in the number of FSDs being issued.