The trustees of failed TV rental business Box Clever’s defined benefit pension scheme have come under scrutiny for their decisions involving the fund’s setup, as part of an Upper Tribunal hearing on the company’s collapse.
The Pensions Regulator is seeking to impose a financial support direction on Granada, now ITV, for its role in the creation and subsequent demise of the business.
If we had removed this continuous service benefit there very likely would have been strikes within the workforce and the unions would have certainly not been happy
Alan Herbert, Box Clever chair of trustees
But lawyers for ITV have now questioned a string of decisions made by the scheme’s trustees, alleging that these decisions had a swelling impact on the £95m deficit now being decided on in the case.
When Box Clever was created as a joint venture between Granada and Thorn in 2000, it was originally imagined that all staff it had inherited from the two shareholders would have to transfer their accrued benefits into the new Box Clever scheme.
The tribunal heard that this would ensure members accrued benefits based on continuous service and would receive a higher amount; their entire pension would be calculated on their final salary when leaving Box Clever.
Lawyers for ITV claim Granada was not the driving force behind this plan.
“It’s clear that unlike Thorn, Granada were prepared to have members join the scheme without a transfer,” Michael Furness QC, acting for ITV, told the tribunal on Tuesday.
By contrast, the Box Clever chair of trustees Alan Herbert said there was a “clear intention” from Granada that the bulk transfer should go ahead.
Criticism over continuous benefits
However, valuations of the liabilities and assets to be transferred took longer to agree than planned, and when they were agreed it became clear that the scheme would face a deficit if it accepted the transfers.
In the expectation that the valuation issue would be resolved, the tribunal heard that the scheme was started by a deed anyway for past and future service, despite not yet having the assets to fund these promises.
Pointing to evidence that members were not adequately informed of this situation, Furness suggested that an expectation of continuous benefits had been created, when otherwise the legacy liabilities could have been left with Granada and Thorn.
The trustee was “running the scheme on… with no guarantee that past benefits would be provided and simply not telling members,” according to Furness.
Responding to these criticisms, Herbert suggested the trustee had little choice but to try to provide continuous benefits.
“If we had removed this continuous service benefit there very likely would have been strikes within the workforce and the unions would have certainly not been happy,” he told the tribunal, adding that members had been kept up to date.
Trustees chose top-up arrangement
With the transfer values insufficient, the Box Clever scheme, which was paying retiring members the promised continuous service benefits in the expectation that an agreement would be reached, began building up a deficit of £18.2m by 2002. Trustees turned down the transfer values on offer from the two legacy schemes.
The trustees’ solution took the form of a top-up arrangement, the tribunal heard.
Staff’s past service benefits would remain in the Granada and Thorn schemes, with an allowance for increases in salary in line with the retail price index capped at 5 per cent.
Any salary increases above RPI, which the sponsor at the time said would be rare and would cost approximately £5m, would be shouldered by the Box Clever scheme, the tribunal heard.
However, ITV’s lawyers suggested the trustee should have considered the cost of providing these benefits on a winding-up basis too, as well as possible salary rises significantly above inflation.
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When the operating companies of Box Clever went into receivership in 2003, the receivers awarded large staff pay rises, worsening the situation.
“You needed much more valuation advice than you got before you took the decision,” Furness told Herbert and the tribunal.
The scheme has a deficit of £95m as of January 2016. If it had taken the transfers from Granada and Thorn, the tribunal heard the deficit would have been £439m.
ITV also attacked the Box Clever trustee decision not to close the scheme to future accrual as soon as the operating companies entered receivership, when it finally entered the Pension Protection Fund’s assessment period.
Trustees were not immediately able to trigger a winding-up debt, as the holding company for the Box Clever companies was not technically insolvent, though it had no assets and owed secured debt to the banks that financed the joint venture.
That technical glitch was later resolved, but the scheme still delayed entering the PPF. The reason, the tribunal heard, was simple. “The trustee felt that it would restrict its ability to make special arrangements for a negotiated settlement,” said Herbert. The case continues.
