In this February edition of the Pensions E-Bulletin, we revisit the upcoming abolition of defined contribution contracting-out and also look at the Pensions Regulator’s decision to issue a financial support direction against ITV.

The abolition of DC contracting-out with effect from 6 April 2012

Last year we highlighted the Government’s decision to abolish defined contribution (DC) contracting-out due to the uncertainty of the ultimate benefit provided by DC schemes and the consequent difficulty of judging whether individuals would be better off in the State Second Pension (S2P) or contracted-out.

With effect from 6 April 2012, money purchase contracting-out certificates will automatically be cancelled and relevant members contracted back into S2P. The statutory restrictions that apply to protected rights accrued will also be removed and schemes will no longer be required to make special provision for protected rights in their rules. This means that protected rights will not need to be separately identified and can be treated in the same way as ordinary money purchase benefits; for example, schemes will no longer need to make provision for a survivor’s benefit on the death of a member with protected rights.

Crucially, the legislation removing the statutory restrictions does not override scheme rules and therefore, if protected rights are written expressly into scheme rules, amendments may be required to remove any restrictions that apply. Defined benefit scheme which are or have been contracted-out on a DC basis will also need to consider how the protected rights underpin will apply going forward.

Schemes which are currently contracted-out on a DC basis must inform members within one month of 6 April 2012 that they have ceased to be contracted-out. In addition, trustees will have a period of four months to explain to members the effect that the abolition of DC contracting-out has on existing protected rights and their entitlement to S2P.

Any scheme which is or has been contracted-out on a DC basis should, if they have not already done so, consider as soon as possible what action needs to be taken as a result of the upcoming abolition of DC contracting-out.

Pensions Regulator issues financial support direction against ITV

The Pensions Regulator has issued financial support directions (FSDs) against five companies within the ITV group requiring them to provide financial support to the Box Clever Group Pension Scheme. This is only the fourth time that the Pensions Regulator has used its power to issue FSDs and the determination is particularly interesting as it relates to events which took place over a decade ago and which pre-date the legislation granting the Pensions Regulator its anti-avoidance powers.

FSDs: an overview
The Pensions Act 2004 introduced the Pensions Regulator’s power to impose an FSD where the employer of a defined benefit pension scheme is a service company or is insufficiently resourced. The FSD may require another employer and/or those associated or connected to the employer to put in place financial support for the scheme. The support must remain in place until the scheme winds up. The Pensions Regulator may only impose an FSD where it considers it reasonable to do so.

Box Clever Group Pension Scheme: the facts

The case arose from a highly leveraged joint venture in 2000 which merged Granada’s and Thorn’s television rentals businesses to form the Box Clever Group. Granada (which later merged with Carlton Communications to form ITV) received over £500 million from the Box Clever Group (approximately £352 million was received in cash and liabilities of around £158 million were repaid). These payments were funded through borrowing by the Box Clever Group of over £860 million.

By 2003 the Box Clever Group was unable to service the debt and administrative receivers were appointed. In 2005, the Box Clever businesses were sold by the administrative receivers but the proceeds were insufficient to meet the claims of the unsecured creditors including the Trustee of the Box Clever Group Pension Scheme, which had a buyout deficit of approximately £62 million.

The Pensions Regulator’s determination
The Pensions Regulator found that the statutory tests for issuing an FSD were met and that it was reasonable to impose the FSDs on the target ITV companies, noting the following:

  • The FSD regime is not fault-based and it is not necessary for any evidence of misconduct to be found.
  • There is no express temporal limitation in the legislation relating to FSDs (as there is for contribution notices) and therefore the Pensions Regulator should have regard to all relevant matters no matter when they occurred.
  • The individual factors that “weighed most heavily” were the value of benefits received by the target companies from the Box Clever Group (and the other participating employers) and the target companies’ relationship with the Box Clever Group:
    - the joint venture structure resulted in substantial financial returns for the ITV group whilst allowing them to participate in future value (although none was in fact created); and
    - the ITV group had actual influence over the Box Clever Group and the board of the Box Clever Group contained directors appointed by the ITV group.
  • The ITV group had a close connection and involvement with the inception and development of the Box Clever Group Pension Scheme (which offered transferring employees defined benefits which mirrored the benefits under the Granada and Thorn pension schemes).

ITV have appealed the determination on the basis that the imposition of the FSDs is unreasonable. We will keep you updated as the case progresses.

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