Upper Tribunal entitled to reach conclusion that it was reasonable to impose FSDs on ITV group companies (Granada UK Rental & Retail Ltd v The Pensions Regulator)

On 20 June 2019, the Court of Appeal handed down its decision in Granada UK Rental & Retail Ltd v The Pensions Regulator, finding that the Upper Tribunal was entitled to reach the conclusion that it was reasonable to impose financial support directions (FSDs) on five companies in the ITV group (the Targets) requiring them to put in place financial support for the Box Clever Group Pension Scheme. The Court of Appeal also agreed that the Pensions Regulator could consider matters and events that occurred before the Pensions Act 2004 (PeA 2004) came into force in reaching its conclusion.

Granada UK Rental & Retail Ltd and others v The Pensions Regulator and another [2019] EWCA Civ 1032

What are the practical implications of this case?

The Court of Appeal’s decision is a victory for the Pensions Regulator and provides further guidance on how it should carry out the reasonableness test under the legislation for imposing an FSD, in particular that:

  • in assessing reasonableness, the Regulator can take account of actions and events which took place before the coming into force of PeA 2004  
  • the absence of fault on the part of the Targets does not necessarily mean that the balance has to come down against imposing an FSD, and  
  • factors relating to retrospectivity (which must be taken into account when assessing reasonableness and may tend against the issue of an FSD) can be outweighed by the factors in favour of an FSD

Ultimately, it is for the Pensions Regulator/Upper Tribunal to decide how much weight to give to the various factors and whether, giving each factor appropriate weight, the imposition of an FSD is reasonable.

However, the Regulator’s victory has come at the cost of expensive and long-running litigation lasting eight years so far (and potentially longer if ITV is permitted to appeal to the Supreme Court). It perhaps comes as no surprise then that there are already plans to introduce measures to strengthen the statutory FSD regime under PeA 2004, s 43, expected to be part of a new pensions bill to be introduced ‘when parliamentary time allows.’ Whether the measures ultimately reduce the scope for challenges to the Regulator’s powers, and the costly and time-consuming litigation that can result, remains to be seen.

On a separate note, pension scheme trustees will be pleased that the Court of Appeal agreed with the Upper Tribunal and with Henderson J in Independent Trustee Services v Hope that there is no single all-purpose answer to the question whether the availability of the Pension Protection Fund (PPF) is a relevant consideration for trustees to take into account when making decisions. The Court of Appeal confirmed that it will depend on the context and purpose of the particular power which the trustees are proposing to exercise and the particular way in which they wish to take the PPF into account.

What was the background?

This judgment is the latest decision in the Box Clever series of cases following the Pensions Regulator’s decision in 2011 to issue financial support directions (FSDs) to five companies in the ITV group (the Targets) requiring them to put in place financial support for the Box Clever Group Pension Scheme.

Between 1999–2000, ITV (then Granada) established a TV rental business called Box Clever which was a joint venture bringing together its own TV rental business with that of a competitor, the Thorn group. As a result of the joint venture, Granada enjoyed a very significant immediate cash benefit. As part of the establishment of the joint venture, a defined benefit pension scheme was set up—the Box Clever Group Pension Scheme (the Scheme). However, in 2003 the joint venture went wrong and the entities entered administration. As a result the Scheme was left, and remains, significantly underfunded.

The Targets referred the determination of the Pensions Regulator to issue FSDs to the Upper Tribunal in January 2012. Following a series of hearings and judgments to determine a number of preliminary issues, the substantive hearing was heard in the Upper Tribunal in early 2018 where it considered whether it should uphold the Pensions Regulator’s determination on 21 December 2011 to issue FSDs to the Targets requiring them to provide financial support to the Scheme. It was the first time an anti-avoidance case by the Pensions Regulator had been heard in full in the Upper Tribunal.

On 18 May 2018, the Upper Tribunal handed down its decision when it ruled that the Pensions Regulator was right to use its powers to seek financial support from the Targets for members of the Scheme through the issue of FSDs and that it was reasonable for the Targets to provide financial support for the Scheme given the circumstances of the case.

Applying the reasonableness test under PeA 2004, s 43(7) to the present case, the Tribunal ultimately concluded that the key issue of responsibility for the risks to the Scheme that the Targets agreed to create as a defined benefit scheme, and the substantial benefits received through a structure that the Targets created and which meant that the Scheme had a weak employer’s covenant, clearly outweighed on the facts of the case the strong points that the Targets made on retrospectivity (namely, that the Targets could not have known at the time of the transaction that further liabilities were liable to be imposed as a result of it, and that they had no opportunity to seek clearance in relation to the transaction because the clearance regime did not exist at the time).

Furthermore, the Upper Tribunal found that in the exercise of its FSD powers, the Pensions Regulator could take into account actions and events which occurred before the coming into force of PeA 2004.

The Targets then appealed to the Court of Appeal against the Upper Tribunal’s decision, with the appeal focusing on three main issues:

  • was the statutory FSD regime under PeA 2004, s 43 intended to have, or could it lawfully be given, retrospective effect in the sense of permitting the Pensions Regulator to have regard to events and other matters which pre-dated the coming into effect of the relevant provisions of the Act on 6 April 2005? 
  • the Targets disputed that they were ‘connected with or an associate of’ any of the joint venture employers on the relevant date of 31 December 2009 
  • the Targets contended that, even if the statutory FSD regime under PeA 2004, s 43 did empower the Pensions Regulator to rely on matters which pre-dated the commencement of the legislation, and the Targets remained associated with the joint venture employers as at the relevant date, it could not be reasonable to issue an FSD in this case given that the joint venture arrangements were accepted to have been a reasonable commercial decision for the Targets to have taken at the time, that they did not involve any element of fault or misconduct including moral hazard, and that they could not have been the subject of an application for a clearance statement before a decision on implementation was made

What did the Court of Appeal decide?

The Court of Appeal dismissed the Targets’ appeal on all three main issues.

Was PeA 2004, s 43 intended to have, or could it lawfully be given, retrospective effect?

The Court of Appeal did not accept that when considering whether it was reasonable to impose an FSD, the matters to be considered in the assessment of reasonableness under PeA 2004, s 43(7) could not include anything which occurred before PeA 2004 came into effect.

The Court said that the obligation imposed on the Pensions Regulator by PeA 2004, s 5(1) to exercise its functions so as to protect the benefits under occupational pension schemes and to reduce the risk of compensation becoming payable out of the PPF pointed strongly towards giving the words of s 43(7) their ordinary and natural meaning (eg the references in PeA 2004, s 43(7)(a) and (c) to the relationship or connection which the target ‘has had’ with the employers under the pension scheme and with the pension scheme contained no obvious contextual limitation as to how far back the Regulator might go). It was therefore unlikely that Parliament intended in effect to limit the scope of the power to issue an FSD to future circumstances rather than to give it a wide and immediate effect.

This view was reinforced by the fact that, even where the Target came within the ambit of the legislation under PeA 2004, s 43(5)(a), liability could only be imposed if the Pensions Regulator considered it reasonable to impose the requirements of an FSD. Indeed, it seemed to the Court of Appeal that, in deciding whether Parliament intended to give PeA 2004, s 43 retrospective effect, the legislature would have taken into account the fact that the Pensions Regulator and the Upper Tribunal had to consider all relevant circumstances (including the lack of availability of the clearance procedure) before deciding to impose an FSD, and it seemed unlikely to the Court of Appeal that Parliament would have considered the safeguards which it chose to insert as insufficient to cater to the degree of unfairness involved.

The Court of Appeal considered, as the Upper Tribunal did, that any consideration of the potential unfairness of imposing liability in circumstances where relevant events occurred before the legislation was contemplated or before a clearance statement could have been applied for had to take account of, and give much more weight to, the purpose of the legislation, the interests it served to protect, and the consequences to others of limiting the scope of the FSD power to events which post-dated the legislation.

On separate ground of appeal, the Court of Appeal also found that the Upper Tribunal was correct to find that the Targets failed to show that s 43 would infringe Article 1 of the First Protocol to the European Convention of Human Rights (A1P1). It agreed with the Upper Tribunal that the legislation struck a fair balance between the interests of the Targets, those of the members of under-funded pension schemes, and the levy payers who would otherwise be required to fund the shortfall through the PPF.

Was it reasonable for the Pensions Regulator to issue an FSD?

The Court of Appeal held that in the circumstances of the case the Upper Tribunal was entitled to reach the conclusion that it did, namely that the factors in favour of an FSD clearly outweighed on the facts of the case the strong points that the Targets made on retrospectivity, and there was no error of law involved in that conclusion.

The Court of Appeal did not accept that the absence of fault on the part of the Targets meant that the balance in such a case had to necessarily come down against imposing an FSD. The distinction drawn by the Upper Tribunal between fault on the one hand and responsibility on the other was, in the Court of Appeal’s view, a valid one. Indeed, it was possible to say, as the Upper Tribunal did, that even though a target was not at fault legally or ethically, it nevertheless bore a high degree of responsibility for an insufficiency of funding in the pension scheme.

Further, even in a case where all relevant events and transactions occurred before the coming into force of the legislation, there remained a balance to be struck and it was for the Tribunal to decide how much weight to give to the various factors and whether, giving each factor appropriate weight, the imposition of an FSD was reasonable. Retrospectivity, even in a case where the target was not at fault, was not necessarily a trump card. In such a case, where there was no valid criticism to be made of the Targets’ conduct, it would only be reasonable for an FSD to be imposed if the factors relevant to retrospectivity were clearly outweighed by the factors in favour of an FSD, which is exactly what the Upper Tribunal found.

In addition, the Court of Appeal could see no error of law in the reasoning behind the Upper Tribunal’s conclusion that it was lawful in the circumstances of the case for the Trustee to have some regard to the availability of the PPF when deciding whether to continue the Scheme or to wind it up. The Court of Appeal agreed with the Upper Tribunal and with Henderson J in Independent Trustee Services v Hope that there is no single all-purpose answer to the question whether the PPF is a relevant consideration for trustees to take into account. It all depends on the context and purpose of the particular power which the trustees are proposing to exercise, and the particular way in which they wish to take the PPF into account.

Were the Targets ‘connected with or an associate of’ any of the Employers within the meaning of PeA 2004, s 43(6)(c) on the relevant date of 31 December 2009?

The Court of Appeal found that, on the specific facts of the case, the Upper Tribunal was correct that the Targets were associates of the joint venture employers within the meaning of PeA 2004, s 43(6)(c) on the relevant date of 31 December 2009.

The Tribunal had concluded that the Targets had control of the employers within the meaning of the Insolvency Act 1986, s 435(10)(b) because they were entitled to control the exercise of one third or more of the voting power at any general meeting of the employer, and rejected the Targets’ argument that the chain of control was broken as a consequence of the appointment of administrative receivers in September 2003.

Case details

  • Court: Court of Appeal (Civil Division)  
  • Judges: Patten LJ, Newey LJ, Males LJ  
  • Date of judgment: 20 June 2019

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