In a groundbreaking decision, the Upper Tribunal (UT) has upheld The Pensions Regulator's (TPR) authority to issue Contribution Notices (CNs) and shed light on their scope, clarifying that the amount of a CN is not limited to the loss suffered by the pension scheme. In this article, we look at this landmark decision and consider some of the key takeaways.

Background

The case revolved around the Meghraj Group of companies, specifically focusing on the sponsoring employer of the Meghraj Group Pension Scheme (the Scheme), Meghraj Financial Services Limited (MFSL). In 2014, MFSL went into creditors' voluntary liquidation, leaving the Scheme with a deficit of £5.85 million on a buy-out basis. An investigation by TPR uncovered a series of payments made from MFSL to its parent company, Meghraj Property Limited, primarily dividends following MFSL's sale of its shares in a joint venture company.

TPR contended that these payments should have been used to support the Scheme, and their diversion was materially detrimental to the Scheme's members. Consequently, TPR sought a CN against two targets: Anant Shah, a director of MFSL, and his nephew Rohin Shah. The facts of this case are complex, but TPR's overall finding was that Rohin and Anant Shah took part in a series of acts that as a whole were materially detrimental to members' benefits. TPR's Determination Notice noted that it was "an important feature of the case that they [Rohin and Anant Shah] were part of a family business, with a lack of formality over money flows and documents. It is in such circumstances that “non-family” third parties such as the Scheme may not be treated equitably, as appears to have happened in this case."

A CN is a financial obligation requiring the payment of a sum of money to a defined-benefit scheme. A CN can be imposed by TPR if:

• TPR is of the opinion that the person was a party to an act or a deliberate failure to act which meets one of four tests (material detriment, main purpose test, employer insolvency or employer resources);
• the person was at any time in the relevant period the employer in relation to the scheme or a person connected with or an associate of the employer;
• the person was not acting in accordance with his functions as an insolvency practitioner; and
• TPR is of the opinion that it is reasonable to impose liability on the person taking into account all the circumstances of the case.

A CN can be up to the amount of the section 75 buyout deficit in the scheme, and TPR can look back at acts or failures to act in the previous six years.

In this case, TPR found the material detriment test was met. This means that the act(s) committed were found by TPR to be materially detrimental on the likelihood of members receiving their benefits.

The Determinations Panel reviewed the case in 2020 and agreed with TPR, issuing a Determination Notice for a CN of £3,688,108 against both targets jointly and severally. Subsequently, both targets appealed the decision, leading to the recent UT judgment.

It is worth noting that this case pre-dates TPR's new powers, which you can read more about in our previous briefing, and these new powers further strengthen TPR's hand.

The Appeal

Before the hearing, TPR settled its case against Rohin Shah.

The UT agreed with TPR's arguments, confirming that it was reasonable to impose a CN on Anant Shah, totalling £1,875,403, which included 50% of a payment made in 2014 which the UT agreed should have been made available to the Scheme, along with an uplift to account for the passage of time since the acts under scrutiny. This amount was found to be reasonable as Anant Shah's actions were found to be materially detrimental to members' benefits.

The most significant aspect of the UT's ruling was the clarification of the CN's scope. It affirmed that the amount of a CN should be determined based on what is reasonable and is not restricted solely to a scheme's financial loss resulting from the actions or inactions in question. This clarification effectively ends the speculation surrounding whether CNs should be purely compensatory or have a broader financial impact.

TPR's Director of Enforcement, Erica Carroll, welcomed the judgment, expressing satisfaction with the UT's validation of their long-standing interpretation of the legislation. Carroll emphasised that the ruling provides much-needed clarity on how CN sums should be calculated and confirms that they can indeed go beyond mere compensatory measures.

Takeaways

This case has shed a light on important aspects of CNs and their enforcement, presenting several key takeaways:

1. Confirming TPR's exercise of CNs: The UT's ruling clarified that the amount of a CN is not confined solely to the financial loss suffered by the pension scheme. This confirms that TPR is able to consider a more comprehensive range of factors when calculating the contributions required from implicated parties, and that those responsible for diverting funds away from pension schemes can be held accountable beyond mere compensatory measures.
2. Reasonableness in determining contribution amount: The judgment emphasised the principle of reasonableness when determining the CN amount. TPR has the flexibility to consider various factors and arrive at a fair and equitable contribution sum that addresses the impact of the actions or inactions on the pension scheme. This aspect of the ruling encourages a balanced approach in calculating CNs, providing a fair resolution for both scheme members and implicated parties.
3. Clarity and certainty for TPR and industry: The UT's ruling provides much-needed clarity for TPR and the pensions industry. By offering a definitive interpretation of the legislation regarding CNs, the ruling dispels uncertainty surrounding the scope of these notices. This clarity empowers TPR to take more decisive action against those responsible for detrimental actions to pension schemes, bolstering the confidence of savers and industry stakeholders. As a result, TPR can now approach similar cases with a more defined understanding of its enforcement powers.
4. Commitment to protecting savers' money: The case against MFSL highlights TPR's commitment to safeguarding savers' funds. TPR's pursuit of CNs and enforcement powers demonstrates a strong dedication to taking necessary actions when pension schemes are put at risk. This determination reinforces the importance of stringent regulatory oversight to ensure the financial security of pension scheme members.

Conclusion

The UT's recent judgment represents a significant milestone for TPR, reinforcing its power to issue CNs and providing much-needed clarity on their scope. With this precedent set, TPR can more effectively safeguard pension schemes and take appropriate action against those who put savers' funds at risk.