The difference between blame and responsibility – ITV v The Pensions Regulator

The facts

In 1999-2000 Granada (now ITV) and Thorn (now Carmelite) combined their TV rental businesses in Box Clever, a newly created joint venture (JV) owned 50 / 50 by Granada and Thorn.

Box Clever’s purchase of the business assets from Granada and Thorn was funded by a secured loan from Westdeutsche Landesbank (WestLB) of £860m. Neither Granada nor Thorn was liable for the loan. 

At completion, the JV was valued at £980m. Granada received £528m and Thorn received £332m, funded by the WestLB loan, and the balance of the purchase price was left outstanding as loan notes.

Employees were transferred to the JV and, after a period of temporary participation in the Granada and Thorn schemes, they were enrolled in the Box Clever pension scheme in 2001. Following negotiations with the trade union, benefits were provided under the Box Clever pension scheme on a defined benefit basis.  No transfer was made of past service liabilities from the Granada and Thorn schemes.

Box Clever did not prosper. In late 2003, WestLB appointed administrative receivers over Box Clever companies. Granada and Thorn were not involved in the Box Clever business after this point.

The administrative receivers sold the Box Clever business in 2005, with the proceeds of sale going to WestLB.

From 2004 to 2009, negotiations took place between Granada / ITV and the trustees of the Box Clever scheme over transferring members of the Box Clever scheme to the Granada / ITV scheme.

In 2008, Thorn (Carmelite) applied to The Pensions Regulator (TPR) for a clearance statement. On advice, TPR took the view that Carmelite was not “associated” with Box Clever, assuming that the appointment of administrative receivers in 2003 excluded control by the shareholders. Based on this mistaken view, it provided a letter of comfort to Carmelite in February 2009. Granada (ITV) made a similar application for clearance in November 2009. However, TPR had corrected its view on the law and refused to grant clearance to Granada (ITV).

On 21 December 2011, TPR’s Determinations Panel issued FSDs against five Granada (ITV) companies (referred to collectively as ITV). ITV referred the determinations to the Upper Tribunal. Proceedings have been delayed by determination of a number of interlocutory matters.

The Upper Tribunal’s decision

In reaching its decision to confirm the imposition of FSDs on ITV, the court considered two categories of issues raised by ITV (i) whether TPR had the jurisdiction to issue the FSDs in the circumstances and (ii) whether it was reasonable to do so.

The Upper Tribunal’s findings on jurisdiction issues include the following:

• Lack of association:  ITV argued it was not “associated” with Box Clever on 31 December 2009 (the relevant date chosen by TPR), because it did not have control of “voting power” in Box Clever after the appointment of administrative receivers in 2003. Distinguishing Unidare plc v Cohen, the court held that the administrative receivers exercised the voting rights as agent of the company and were no more third parties than directors. The court also confirmed that it is sufficient for FSD purposes that ITV had “control” of one of the employers, not all of them.
• Retrospectivity:  FSDs can be imposed by reference to actions taken before the Pensions Act 2004.  This does not breach either the presumption against retrospective legislation or the European Convention on Human Rights because FSDs are a means to provide financial support for underfunded schemes - “a present solution to a present problem” - and are not based on any wrong-doing.  As such, there is no criticism or sanction for actions taken in 1999-2003 on the basis of later law. 
• Discrimination: The court found sufficient justification for imposing an FSD on ITV while not revoking its letter of comfort to Carmelite because of the objections Carmelite might raise, and because the letter of comfort had been issued under a mistake.
• Absence of moral hazard:  ITV argued that FSDs were proposed to address a “moral hazard”, described at the time as the risk that “employers will deliberately manipulate their affairs” to shift liabilities onto the Pension Protection Fund. The court held this did not mean that identification of moral hazard was a requirement for an FSD. Finding no fault or criticism is required for an FSD, the court emphasised the “important distinction between blame and responsibility”.

The Upper Tribunal’s findings on reasonableness issues include the following:

• The specific matters in the non-exhaustive statutory list of factors to consider in relation to reasonableness do not need to be given equal weight, nor does each factor need to be present. In particular, that a target has not received a substantial financial benefit is not a bar to an FSD being issued.  Terms such as “relationship”, “involvement” and “benefit” should be given a wide meaning.
• In relation to ITV, the court found that:
  • there had been a close relationship with Box Clever through establishment of the joint venture and later involvement with the business and representation on its board, albeit such involvement had ceased in 2003;
  • ITV had received financial benefit, irrespective of any over-valuation of the business transferred to Box Clever; and
  • the structure of the joint venture and the debt burden assumed by Box Clever, pursuant to ITV’s decisions, had been a factor in its failure.
• The court found that the actions of the trustees and the administrative receivers which had led to material increase in the liabilities of the scheme by raising pensionable pay or deferring winding-up and responsibility for Carmelite’s share were relevant only to quantum, not to the reasonableness of issuing an FSD. No direction is however given as to the quantum for an FSD or how this should be addressed.
• The court also commented that, had ITV undertaken to support Box Clever (which it had not), this would have been a “strong pointer” in favour of the issue of an FSD.
• That a target is well resourced should be considered a neutral factor.

Comment

ITV v TPR is the first FSD case to be given a substantive hearing by the Upper Tribunal. ITV may appeal.

It provides a clear ruling on the key retrospection point about whether FSDs can be based on events before the introduction of the PPF which gave rise to the “moral hazard” concern. It does so by disassociating FSDs from “moral hazard” and putting much weight on the “distinction between blame and responsibility”. 

It also provides important judicial commentary on reasonableness in the context of the issue of FSDs. In particular, it can be reasonable to impose an FSD where the target has not received a benefit from the employer and the fact a target is well resourced should not make it more reasonable to impose FSDs.

The slightly paradoxical outcome is that liability for contribution notices (which are fault-based) is capped and can only be imposed for actions taken within the last six years and in any event only after 27 April 2004 when the legislation was proposed. Liability for FSDs is not fault-based but is uncapped and has an unlimited look-back. The greatest liability can be imposed without blame.