Contribution notice of £3.6mn hints at ‘new era’ of TPR powers

The Pension Schemes Act 2021 gave the regulator expansive new powers, introducing two new categories of criminal offence: avoidance of employer debt, and conduct risking accrued scheme benefits.

The scope of the new offences, combined with a lack of certainty as to when and how they would be applied, led to significant industry concern, with fears that they could put off necessary corporate activity for fear of being found liable for any damage done to members’ retirement prospects or the scheme itself, whether that damage was foreseen or not.

This illustrates that all operations of a corporate group, including those conducted overseas, may be relevant to how TPR exercises its moral hazard powers

Addleshaw Goddard

Though the regulator itself tried repeatedly to reassure the industry that the new powers were not intended to obstruct legitimate business activity, a consensus emerged that test cases would have to emerge before the full impact of the changes was known.

David Fairs, TPR’s executive director of regulatory policy, analysis and advice, told Pensions Expert in a podcast in March last year: “It’s very clear that experience will evolve, court decisions will clarify the sort of circumstances where these sanctions will apply. So, clearly, the entire policy will evolve depending on our experience and the experience of industry, and we will update the policy and monitor the situation as things go by.”

The Meghraj case

Such a test case appears to have emerged in the form of the Meghraj Group Pension Scheme, in connection to which TPR has used its moral hazard powers to issue a contribution notice for more than £3mn.

TPR had issued a warning notice to two individuals, Anant and Rohin Shah, in 2018, relating to a group of companies called the Meghraj Group. Its determinations panel then met in 2020 to decide whether to issue a contribution notice to the Shahs.

One of the companies, Meghraj Financial Services Limited, was the sponsoring employer of a UK defined benefit scheme, the MGPS, which is currently in the Pension Protection Fund assessment period after MFSL went into liquidation in 2014.

For some years, MFSL had been the sole legal owner of Meghraj Properties Limited, which in turn owned shares in an Indian company, referred to by TPR as Indian JV.

MPL made significant sums of money from dividends, and from disposing of its shares in Indian JV, between 2007 and 2011. MPL then paid much of this money to its parent company, MP Group Limited, registered in the Isle of Man, which in turn paid money out to two further companies, one of which had been nominated by R Shah, from which he benefited financially.

In 2014, MPL received the last of the proceeds from the sale of its shares in Indian JV and paid them — totalling £3,688,108 — into another company, registered in Jersey, that was the nominee for R Shah. 

TPR’s case team argued that, until 2012, the profits from Indian JV were legally owned by MPL and became the property of MFSL once they were paid to it in the form of dividends. They were therefore available to be paid to its creditors, including the pension scheme, once the company went into liquidation.

The Shahs contested this verdict, however, arguing that the profits from Indian JV were never at the “free use” of either MPL or MFSL, due to profit-sharing agreements struck between the Shahs.

One such agreement, struck in 2012, stipulated that MFSL “shall have no further entitlement to or claim in respect of any sale proceeds”. A payment followed in 2014.

The case team argued that the agreement and the payment resulted in the removal of a “valuable asset” from MFSL, harming its ability to meet its liabilities to the scheme. This failed the “material detriment” test of TPR’s moral hazard powers.

It was on this basis that a warning notice was issued seeking the issuance of a contribution notice to the Shahs for the total of the 2014 payment. The Shahs again contested this ruling.

Meeting in 2020, the regulator’s determinations panel ruled that, though the Shahs had indeed distributed the profits in accordance with their earlier agreements, those agreements were not legally binding. 

One of the provisions relating both to the regulator’s new powers and its contribution notice regime is that it must satisfy itself that the issuance of such notices meets a “reasonableness” test. In this case, the determinations panel found that A Shah had failed for a number of years to provide the scheme’s trustee with full information as to the value of Indian JV.

It accepted that R Shah had no material involvement at all with MFSL, or with the pension scheme following the appointment of a professional trustee in 2006, but it also found that he knew it was possible that the scheme could obtain some of the proceeds from Indian JV, and that he should have taken legal advice before transferring them out of the reach of the scheme.

It therefore determined that a contribution notice be issued to both Shahs, on a joint basis, for £3,688,108.

A ‘new era’

Reacting to the news in April, several legal experts suggested the Meghraj case could mark the start of a “new era” under TPR’s updated criminal powers.

In a blog post at law firm Stephenson Harwood, partner Stephen Richards and senior associate Chris Edwards-Earl noted that TPR was inevitably going to clear up the uncertainty surrounding its new powers by the publication of case reports, like that concerning the Meghraj case, that would provide “insight into what the new era will look like”.

They wrote that the case “potentially evidences TPR’s willingness to protect UK pension schemes regardless of their size. Although these are not high-profile prosecutions or penalties, the case does suggest that TPR is becoming more confident to pursue smaller matters”. 

“It will therefore be important for schemes of all sizes to take note of TPR’s new powers and implement effective internal governance to avoid the scrutiny and sanctions of TPR,” they continued.

“TPR has had a history of getting bogged down in large-scale cases prone to ‘scorched earth’ litigation, so targeting smaller schemes where behaviour has been inappropriate, securing a settlement and moving on could be the new approach.” 

Richards and Chris Edwards-Earl added that the case could also be read as signifying the regulator’s “growing willingness to move against corporate groups with overseas interests”. 

“The fact that TPR pursued the Indian JV shows how foreign protagonists are not an obstacle for TPR (consider also the Silentnight case). This trend seems likely to continue,” they said.

Law firm Addleshaw Goddard also said the case constituted an illustrative example of TPR’s approach to the material detriment test of its moral hazard powers.

“The sale proceeds at issue in this case were generated by a business in India which appears to have had no direct connection to the pension scheme. This illustrates that all operations of a corporate group, including those conducted overseas, may be relevant to how TPR exercises its moral hazard powers,” it said.  

It added that the case highlights issues arising when “important business arrangements” are operated “on the basis of informal understandings that are not documented”.

In its case notes, TPR said: “It is an important feature of the case that they 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.”

Addleshaw Goddard continued: “Scheme trustees need to ensure they have sufficient understanding of how the sponsoring employer’s wider group is operated.”

An appeal has been lodged, and the case now rests with TPR’s Upper Tribunal.

A TPR spokesperson told Pensions Expert: “The matter has now been referred to the Upper Tribunal. However, it has not yet been listed for a hearing and, at this time, we can’t offer an estimate on when it will. 

“As the UT’s process has not concluded, we do not feel it is appropriate to make a comment at this time.”