UK Pensions - Scope of Regulator’s anti-avoidance powers clarified by Upper Tribunal

The Upper Tribunal has handed down its judgment in the long-running Box Clever case (Granada UK Rental & Retail Ltd and others v The Pensions Regulator). The case is important because it is the first anti-avoidance case to be heard in full by the Upper Tribunal. It clarifies the scope of the Pensions Regulator’s anti-avoidance powers and will therefore be of interest to sponsoring employers of defined benefit (DB) pension schemes and those connected or associated with such employers.

The judgment is lengthy and detailed, so the following is a high level summary of the key points.

What are the Regulator’s anti-avoidance powers?

Since 6 April 2005, the Regulator has been able to issue contribution notices and financial support directions (FSDs) as a means of imposing DB funding liabilities on parties who are not necessarily employers in the relevant scheme. These powers were introduced to protect against the “moral hazard” created by the introduction of the Pension Protection Fund. “Moral hazard” is the risk that employers will deliberately manipulate their affairs so as to shift their liabilities to the PPF.

The Box Clever case concerns an FSD. In short, an FSD requires the recipient to put in place financial support for the scheme. This could include, for example, providing additional contributions to the scheme. The Regulator may issue an FSD if:

  • at some time during the previous two years, the employer was either a service company or insufficiently resourced;
  • at that time, the recipient was connected with or an associate of the employer; and
  • the Regulator considers it reasonable to issue an FSD.

The parties to a transaction can seek clearance from the Regulator in order to obtain some degree of protection against the risk of future anti-avoidance action. However, there is no legal obligation to do so.


In 2011, the Regulator issued an FSD against five companies in the ITV group, requiring them to provide financial support to address an estimated deficit of £115 million in the Box Clever Group Pension Scheme. The Regulator’s case for issuing an FSD was based on the target companies’ involvement in a joint venture known as Box Clever, which existed between 1999 and 2003. The joint venture was established by Granada (now ITV) and Thorn (now Carmelite) when they each sold their TV rental businesses to the newly-created Box Clever group of companies, which was owned 50-50 by Granada and Thorn. The purchase was funded by a loan secured on Box Clever’s assets.

The pension scheme was established in 2001. The Box Clever companies were the sponsoring employers. Neither Granada nor Thorn were sponsoring employers and they had no liability to fund the scheme.

In 2003, administrative receivers were appointed over the principal Box Clever operating companies. The Box Clever business was sold, with all the proceeds of the sale going to the secured lender.

In 2008, Carmelite applied for clearance from the Regulator in relation to its involvement with Box Clever. The Regulator did not give formal clearance, but provided a letter of comfort confirming that it would not pursue an FSD against Carmelite. The Regulator provided this letter on the basis of its then view as to the legal effect of an administrative receiver being appointed on its ability to issue an FSD. By the time Granada applied for clearance, the Regulator had concluded that its earlier view was incorrect and it refused to grant clearance. The Regulator has not pursued the Carmelite group for an FSD.


The Upper Tribunal had to consider the following issues:

  • whether each of the targets was connected with or an associate of the employers at the relevant time (31 December 2009);
  • whether the Regulator has jurisdiction to issue an FSD where all the facts regarding the conduct of the targets relate to events which occurred before the relevant legislation came into force on 6 April 2005;
  • whether the difference in treatment as between ITV and Carmelite is discriminatory such that the Regulator cannot issue an FSD against the ITV companies;
  • whether it is necessary to identify behaviour which is morally hazardous in order for the Regulator’s anti-avoidance powers to be engaged; and
  • whether it was reasonable to impose an FSD on the targets.

The Upper Tribunal has confirmed the Regulator’s determination to issue an FSD to each of the targets. It concluded that:

  • Association: the targets were associated with the employers as at 31 December 2009 as a result of a chain of control which was not broken by the appointment of the administrative receivers in 2003.
  • Retrospectivity: the Regulator does have jurisdiction to issue an FSD where all the facts regarding the conduct of the targets relate to events which occurred before the relevant legislation came into force. The Tribunal said that: “The purpose of the legislation is to create a rescue framework for pension schemes which are in deficit through the medium of imposing new liabilities on those who have had the necessary degree of association and connection with the relevant scheme at the relevant time. The legislation clearly could not meet those objectives if the Regulator was not able to take into account events which had occurred prior to the legislation coming into force, even if those events had sown the seeds of the problems that exist at the time when the exercise of the powers in the legislation is under consideration”.
  • Discriminatory treatment: in this case, there was sufficient objective justification for the difference in treatment between ITV and Carmelite – in particular, the need to correct the Regulator’s mistake (which had resulted in the Regulator’s issuing of a comfort letter to Carmelite) was an objective reason for dealing with the two parties differently.
  • Absence of moral hazard: it is not necessary to identify behaviour which is morally hazardous in order for the Regulator’s anti-avoidance powers to be engaged. The Tribunal said that: “The FSD provisions in the PA 2004 lay down in detail the test which must be satisfied before the Regulator has jurisdiction to issue an FSD. Those do not include any requirement that the conduct of the potential targets was such as to create the moral hazard at which the regime is directed. We do not accept that because the need to avoid moral hazard was part or even the whole of the reason why the FSD regime was devised means that there is some implied additional criterion to be satisfied before an FSD can be issued. There is no basis on which any such requirement can be implied into these detailed provisions”.
  • Reasonableness: it was reasonable in this case to impose an FSD on the targets. The Tribunal said that: “The circumstances relating to the relationship which the Targets had with the Employers point very strongly in favour of the issue of an FSD . . . By their choice of structure for the Joint Venture, the Shareholders extracted considerable cash from the business with no risk of recourse to their assets. They retained an ongoing interest in the merged business with the possibility of further value being generated if the business was successful, but without having to bear any responsibility if the business, whose strategy they continued to determine, subsequently failed”.

Although some aspects of the Upper Tribunal’s decision (such as those relating to association and reasonableness) are fact specific, the judgment provides helpful clarification of the scope of the Regulator’s anti-avoidance powers.

Several practical lessons can be taken from the decision:

  • Actions and decisions taken by employers (and those connected or associated with employers) many years ago may be considered by the Regulator when deciding whether it is reasonable to issue an FSD. Companies need to be aware of this when assessing their potential exposure to anti-avoidance action by the Regulator.
  • Just because one party to a transaction has obtained clearance (or a comfort letter) from the Regulator does not mean that another party will be treated in the same way. The decision whether to apply for clearance needs careful consideration in each particular case.
  • Companies may fall within the scope of the Regulator’s anti-avoidance powers even where the transaction itself is perfectly legitimate and there is no active attempt to shift liabilities to the PPF.

ITV has 14 days from the date of the judgment to seek permission to appeal the decision. If there is no appeal, the Regulator has confirmed in a press release that its Determinations Panel will issue the FSD.

For more information, please speak to your usual Linklaters contact.