England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		The Rolls Building Royal Courts of Justice
		16th January 2014

JUDGE HODGE QC:

1. This is an appeal under s.217 of the Pensions Act 2004 from a determination of the Deputy Pension Protection Fund Ombudsman, Jane Irvine, dated 5^th June 2013. The appellants, TTG Pension Trustees Limited, are the trustees of the TT Group (1993) Pension Scheme. They are represented before me by Mr. John Cavanagh QC, instructed by Wragge & Co LLP. The respondent is the Board of the Pension Protection Fund. They are represented by Mr. Nigel Giffin QC, instructed by Clyde & Co LLP. Both counsel have presented their forceful and thoughtful submissions to the court with commendable economy. This appeal arises from the Board's decision (by letter dated 25^th August 2011) to refuse to accept a guarantee dated 28^th March 2011 from TT Electronics plc, the principal employer under the pension scheme, as satisfying the Board's requirements for recognising a Type A Contingent Asset for the purpose of calculating the pension scheme's risk-based levy for the 2011/2012 levy year. The appellants say that the effect of this decision has been to increase the amount of the risk-based levy charged to the scheme by something in the order of a little under £1.5 million.
2. The appellants have already undertaken the Board's internal review and reconsideration process which culminated in a reconsideration decision dated 15^th June 2012. The appellants then made an application to the Ombudsman pursuant to s.213 of the 2004 Act dated 12^th July 2012. That application resulted in the final determination dated 5^th June 2013, to which this appeal relates. In that determination the Ombudsman concluded that the Board's reconsideration decision had been reached correctly. The appellants submit that in making her determination the Ombudsman erred in law on the following grounds:

(1) The Ombudsman erred in law in that she failed to follow her findings on the correct interpretation of the Levy Rules to their only logical conclusion, which was that the Board and the Reconsideration Committee had been wrong in law to disregard the Contingent Asset.

(2) The Ombudsman misdirected herself in law as to the nature and effect of the Contingent Asset.

(3) The Ombudsman erred in law in not giving sufficient reasons for her conclusion that the Reconsideration Committee's decision was reached correctly.

3. By Respondent's Notice, the Board contends that the determination of the Ombudsman that the Reconsideration Committee's decision had been reached correctly should be upheld on two grounds. First, on the ground on which the Ombudsman based her determination, namely that the Reconsideration Committee was entitled to conclude that the guarantee given by TT Electronics plc did not reduce the risk of compensation being payable from the respondent in the event of an insolvency event occurring in respect of an employer in relation to the appellants' pension scheme. It is said that the guarantee had no practical effect whatever because, when it was given, there had ceased to be any scheme employers other than the guarantor itself. Accordingly, the Reconsideration Committee had been entitled to conclude that rule D2.3(2) of the respondent's 2011/2012 Levy Determination was not satisfied. Secondly, on the different or additional ground that the Ombudsman ought also to have held that the guarantee did not fulfil the condition set out in paragraph 6(a) of the Contingent Asset Appendix to the Levy Determination. At the time when the guarantee was given, the guarantor was not an "Employer's Associate", as defined by paragraph 4(5) of the Contingent Asset Appendix. The guarantor was not an associate of any scheme employer because there were no such employers other than itself. Similarly, it is said that it had not been properly certified that the guarantee satisfied the requirements in paragraph 31(b) of the Contingent Asset Appendix because none of the companies listed in Schedule 1 to the guarantee were scheme employers when the guarantee was given.
4. This appeal has no implications for the future because I am told that the relevant rules have been changed since the levy year to which this appeal relates. Since my judgment is unlikely to have implications extending beyond the parties to this appeal, and even then only in relation to the single 2011/2012 levy year, and since those parties are fully aware of the nature of the arguments that have been advanced before me, it is unnecessary for me to relate their contentions in full.
5. In their written skeleton arguments, respectively dated 10^th July and 26^th July 2013, the appellants and the respondent both set out the statutory framework against which this appeal falls to be considered; the key relevant concepts in the levy rules; how a pension scheme's risk-based levy falls to be assessed; the undisputed facts relevant to the appellants' pension scheme; and the nature and history of the appellants' challenge to the Board's decision to disregard the guarantee for the purpose of assessing the scheme's risk-based levy for the 2011/2012 levy year. In what follows I gratefully adopt the analysis contained within the appellants' written skeleton argument.
6. The Board was established as a statutory corporation by s.107 of the 2004 Act. It exists to provide compensation to members of eligible defined benefit pension schemes when there is a qualifying insolvency event in relation to the relevant employer, and where there are insufficient assets in the pension scheme to cover the Pension Protection Fund (or "PPF") level of compensation. The Board has a duty to impose on all eligible schemes, for each financial year after the initial period, both a risk-based, and a scheme-based, PPF levy. Section 175 provides a method for the assessment of those levies, only the former of which (the risk-based levy) is relevant to this appeal. The levy is charged annually; and the levy year runs from 1^st April to 31^st March in each year. The levy takes account of both the risk of a scheme's sponsoring employer becoming insolvent (which is the Insolvency Risk) and the amount of compensation that might then be payable by the PPF (which is the Underfunding Risk). By s.175(5) of the 2004 Act, the Board must determine in respect of each financial year, before the beginning of that year:

(a) the factors by which the levy is to be assessed;

(b) the time or times by reference to which those factors are to be assessed;

(c) the rate of the levy; and

(d) the time or times at which the levy, or instalments thereof, are to be paid.

The annual determination under s.175(5) is contained in the Levy Rules, which are published by the Board each year, and which make clear and detailed provision for the times at which the various factors relevant to the levy are to be assessed.

7. The Levy Rules relevant to the present appeal are those for the levy year 2011/2012, which were published on 17^th December 2010. Having determined the Levy Rules, the Board must then apply them. It has no discretion (and, in particular, for present purposes, no discretion as to the times at which relevant factors are to be assessed) except to the extent which is expressly permitted by the Rules. The Board is obliged to determine the schemes on which the levy is to be imposed, and also the amount of the levy in respect of each of those schemes. A determination of the amount of levy imposed in respect of a scheme is a "reviewable matter" under paragraph 19 of Schedule 9 to the 2004 Act. As such, an application may be made to the Board for a review of that decision. If an applicant is dissatisfied with the outcome of that review, an application may be made to a Reconsideration Committee of the Board for a reconsideration decision. In reaching such a decision, the Reconsideration Committee must take into account any information or documents provided by the applicant, any representations made by the applicant, and any other matters which appear to it to be relevant, including any relevant change of circumstances since the determination was made. If the application for a reconsideration decision is unsuccessful, a reviewable matter may be referred to the Ombudsman pursuant to regulations made under s.213 of the 2004 Act. The relevant regulations are the Pension Protection Fund (Reference of Reviewable Matters to the PPF Ombudsman) Regulations 2005.
8. The issue to be determined by the Ombudsman following such a reference is whether or not the decision of the Board's Reconsideration Committee was reached correctly. If the Ombudsman considers that the decision of the Reconsideration Committee in relation to a reviewable matter was not reached correctly, the Ombudsman must:

(a) determine what action, if any, the Board should take in relation to the matter; and

(b) remit the matter to the Board with directions for the Board:

(i) to vary the determination, direction or other decision made by the Reconsideration Committee; or

(ii) to revoke and replace the determination, direction or other decision made by the Reconsideration Committee.

The Ombudsman's determination and directions must be in writing and must include:

(a) a statement of the reasons for them;

(b) an explanation as to whether and, if so, to what extent the Board is directed to:

(i) vary or revoke a determination, direction or other decision previously made by the Reconsideration Committee;

(ii) revoke such a determination, direction or other decision and replace it with a different determination, direction or other decision; and

(c) a statement of any legislation relied on by the Ombudsman in reaching the determination.

Under s.217 of the 2004 Act, a person bound by a determination of the Ombudsman made under s.213 may appeal from the determination to the High Court on a point of law.

9. A scheme may seek to reduce its Insolvency and Underfunding Risks through putting in place a Contingent Asset. A Contingent Asset is one that will produce cash for a scheme if certain events happen, in particular when the sponsoring employer suffers an insolvency event. A Type A Contingent Asset is a guarantee given by a group company or other entity directly to the trustees of the pension scheme. Where a Type A Contingent Asset is in place, and depending on the amount guaranteed, the levy may be based wholly or partly on the insolvency risk of the guarantor, rather than on that of the participating employer or employers.
10. Relevant information on the requirements which must be met before a Contingent Asset is recognised, and the mechanism for taking account of a Contingent Asset in the Board's calculation of a scheme's risk, can be found in the Contingent Asset Appendix to the Levy Rules and the PPF's Guidance in Relation to Contingent Assets.
11. Relevant factors going to the calculation of the levy are to be assessed under the Levy Rules at the "Measurement Time". That concept is defined at rule A1.1 as to be "construed in accordance with rule A2.3". Rule A2.3 provides that the "Measurement Time" is to be determined separately in relation to each item of information. It is "the deadline for Submission of that information". The rule then provides that, unless an exception applies, the Measurement Time in relation to each item of information will be 5pm on 31^st March 2013. There are some limited exceptions, which are specified in rule A2.3. For the purposes of this appeal, the only relevant exception concerns information that is provided "in relation to Contingent Assets", in respect of which the Measurement Time is "5pm on 31^st March 2011". The concept of the "Submission" of information is here to be interpreted in accordance with rule A2.2. Except in the case of Contingent Assets (for which, as stated, separate provision is made), it relates to information that was entered on the Pensions Regulator's Scheme Maintenance System (referred to as "the Exchange") and was held there at the relevant Measurement Time. For the avoidance of doubt, rule A3.3 then provides:

"Information Submitted on Exchange by 5.00pm 31 March 2010

The matters referred to in these Rules shall be assessed, measured, quantified or estimated at such dates and in such manner as is provided for in these Rules. In the absence of such provision, these Rules shall be applied in accordance with the position as it existed at 5.00pm on 31 March 2010."

The Levy Rules are therefore said to be clear that, except where contrary provision is made, the date for the assessment of items of information relevant to the calculation of the levy is 31^st March 2010. Insofar as is relevant, contrary provision is made only in respect of the submission of Contingent Assets documentation.

12. Under rule A1.1, "Employer" is as defined in s.318 of the 2004 Act "provided that the identity of the Employer in relation to a Member shall be assessed by the Board by reference to data which has been Submitted in accordance with Rule A2.2". Data submitted in accordance with that rule is information which was entered on the Exchange and was held there at the relevant Measurement Time.
13. Where a Contingent Asset meets the requirements of Rule D2, the Board is required to take that Contingent Asset into account in calculating the levy. In practice, therefore, the result of the formula which normally applies is modified by the effect of any Contingent Asset that has been put in place in accordance with the Levy Rules. For these purposes, under Rule D2.3, "the Contingent Asset must appear to the Board to reduce the risk of compensation being payable from the Board in the event of an insolvency event occurring in respect of an Employer in relation to the Scheme".
14. In October 2010 TT Electronics plc (which was the principal employer), together with the appellants, entered into a scheme apportionment arrangement pursuant to the Scheme rules. The effect of that arrangement was to apportion the pension liabilities of all the scheme's then 13 participating employers solely to the principal employer. On 26^th October 2010, the participating employers issued notices on the basis set out in the arrangement to trigger "employer cessation events". Each of the participating employers paid their commitment under the arrangement and, accordingly, ceased to be a participating employer of the scheme. The effect of this change was to reduce the insolvency risk associated with the scheme because, in consequence of the arrangement, the scheme's liabilities were effectively transferred to the parent company within the group, which was the group's strongest financial entity. It is said that the parent company has a turnover of many multiples of the liabilities taken on as part of the scheme apportionment arrangement. However, under the Levy Rules, that change could not be taken into account by the Board for the purposes of setting the levy as the "Employer", for the purpose of the Levy Rules, consisted of the 13 participating employers as at 5pm on 31^st March 2010. The relevant scheme details "in score" as at 31^st March 2010 appear at Bundle B, divider H, p.604. There are there listed the 13 participating scheme employers.
15. A Type A Contingent Asset, in the form of a guarantee by the principal employer, was put in place on 28^th March 2011, and documentary evidence of it was submitted to the Board on 30^th March 2011. On that day a letter was written to the Board by the solicitors acting for the appellants. A copy appears at p.237 of Bundle A, together with the enclosed documents. The letter enclosed:

(1) a certified copy of the guarantee from TT Electronics plc dated 28^th March 2011;

(2) a blackline document showing the differences from the respondent's required form for such documentation, as published on its website;

(3) a copy of the legal opinion for the guarantee; and

(4) a copy of the Contingent Asset certificate.

By way of background information, the writer of the letter stated his understanding that the respondent considered the position as at 31^st March 2010 when assessing whether to accept the guarantee for levy reduction purposes. In that regard, Schedule 1 to the guarantee was said accurately to reflect the position as at 31^st March 2010. Within the guarantee, the expression "Guaranteed Obligations" was said to mean "all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally and in any capacity whatsoever) of each Company to make payments to the Scheme up to a maximum amount equal to the entire aggregate liability … of every employer … in relation to the Scheme...". The expression "Company" was defined as meaning any of the companies listed in Schedule 1. Schedule 1 listed the 12 companies which had been recorded as scheme employers on the exchange on 31^st March 2010 with the exception of the principal employer, and guarantor, TT Electronics plc.

16. The legal opinion for the guarantee (from Mayer Brown International LLP and dated 29^th March 2011) addressed the issue of guaranteed companies at paragraph 5.5. The writer expressed no opinion as to whether Schedule 1 to the guarantee listed every undertaking which was both an "associate" of the guarantor and an "employer" in relation to the scheme; but in that regard the writer referred the respondent to the Officer's Certificate, which was said to reflect the position as at 31^st March 2010. The Officer's Certificate was dated 28^th March 2011. It was written by Tim Roberts, a director of TT Electronics plc, the principal employer, and certified various matters in seven numbered paragraphs. It also confirmed that the attached schedule of employers for the scheme to which the guarantee related listed every undertaking which was both an "associate" of the Company and an "employer" in relation to the Plan. The Schedule gave the names of all 12 of the employers recorded on the exchange as at 31^st March 2010 with the exception of the principal employer, and guarantor, TT Electronics plc. At Bundle B, divider H, p.607, are the scheme details "in score" as at 31^st March 2011. They record only one scheme employer, the principal employer, and guarantor, TT Electronics plc.
17. During the course of the hearing, in answer to questions from the bench, it was accepted on both sides that had this guarantee been put in place before the scheme apportionment arrangement in October 2010 (and thus in relation to the obligations of the other 12 scheme employers as at 31^st March 2010), the guarantee would have qualified as a Type A Contingent Asset. By entering into the guarantee, the principal employer was effectively seeking to render effective, for the purposes of assessing the risk-based levy, an ill-considered risk reduction measure; ill-considered because it was otherwise ineffective for risk-based levy purposes for the forthcoming levy year. This measure was said by Mr. Cavanagh to be consistent with the Board's policy, as identified by Mr. Collins (its Chief Policy Adviser) in his witness statement dated 31^st July 2013 and supporting documentation, of encouraging risk reduction activity in relation to pension schemes. Although this material had not been available to the Ombudsman, it was sought to be deployed by the respondent Board for the purposes of the appeal. I agree with Mr. Cavanagh that it is not appropriate for me to have regard to this material since the documents within it, to which Mr. Giffin took me, were merely consultation papers, and they do not directly address, and thus are of no material assistance in determining, the issues which arise on this appeal. But, if anything, this material would seem to me to lend support to the appellants' submission that there is no reason in principle why they should be in any worse position than if the scheme apportionment arrangement had not gone ahead, but the principal employer under the scheme had proffered a Type A Contingent Asset instead.
18. As Mr. Cavanagh emphasised in closing, the reality is that the Board is seeking to recover a risk-based levy in the order of £1.5 million in respect of a risk which never crystallised, and could never have done so by the time the risk-based levy was assessed. The Board's response is that this is the consequence of a policy decision to fix the Measurement Time for risk assessment (as contrasted with risk reduction) one year in advance of the raising of the levy, in the interests of stability and long-term planning.
19. The decision of the Board with respect to the levy payable by the appellants was communicated by virtue of an invoice dated 27^th September 2011 in the total sum of £1,636,943. Of that, the risk-based levy had been assessed at £1,586,641. The basis for that decision was made plain in a letter dated 25^th August 2011 sent to the appellants on behalf of the Board. The letter stated that, in calculating the amount of the levy in respect of the scheme, the Board would disregard the Contingent Asset. The letter stated: "The Board has considered all the information provided against the requirements of the levy determination. The principal reason for the Board's conclusion is that the contingent asset does not actually have any practical effect in reducing the risk of compensation being payable in the event of employer insolvency. TT Electronics plc, the guarantor, was already the sole employer from October 2010."
20. By an application for review dated 18^th October 2011, the appellants invited the Board to revoke that decision and to substitute a decision which calculated the amount of the levy in respect of the scheme on what was said to be a lawful basis, in accordance with the Levy Rules. The Board's review decision was made on 10^th April 2012. It concluded that the levy had been correctly calculated, and confirmed that the invoice was correct. On 8^th May 2012, the appellants applied for reconsideration of that review decision. The reconsideration application invited the Board's Reconsideration Committee to revoke the review decision and substitute one which calculated the amount of the levy in respect of the scheme on what was said to be a lawful basis. The Reconsideration Committee's decision was made on 15^th June 2012. In it, the Reconsideration Committee upheld the review decision and the original calculation for the levy payable in relation to the scheme. Following the reconsideration decision, the appellants applied to the Ombudsman pursuant to s.213 of the 2004 Act. It was that application, dated 12^th July 2012, which resulted in the final determination of 5^th June 2013 to which this appeal relates.
21. The Ombudsman's determination is reproduced at divider 24 of Bundle A. The operative part of the determination is contained in paragraphs 56 to 66, with much of the earlier parts of the determination being confined to rehearsing the background to the referral and the respective positions adopted by both the appellants and the respondent Fund. In paragraphs 56 to 61 the Ombudsman accepted the interpretation of the terms "Employer" and "Measurement Time" which had been put forward by the appellants in the Ombudsman referral. At paragraph 59 of her determination the Ombudsman said this:

"Adopting the accepted approach of interpreting such documents in a 'practical and purposive way', I find that the Board are required to identify the Employer in relation to the Scheme, based on the validated data held on Exchange at the relevant Measurement Time (in this case 31 March 2010). There is no mechanism in the PPF Determination to accommodate a change of employer at any point during the levy year. Therefore, the Employer identified at that relevant Measurement Time must, for the purposes of the risk based levy, remain as the Employer for the entire year."

Paragraph 60 reads as follows:

"Once that Employer is so identified the Board must then decide whether any Contingent Asset submissions, made before the deadline for the submission of Contingent Assets (in this case 31 March 2011), appear to have the effect of reducing the risk of compensation payable by the Board in respect of the Employer first identified."

Paragraph 61 of the determination reads:

"Thus, in the case of the Scheme, the Employer consisted of the participating employers as identified on Exchange at 31 March 2010 and the Board needed to assess whether the insolvency risk of those participating employers, and thus the risk of compensation being payable by the Board, would have been reduced by the Contingent Asset submission made on 28 March 2011."

22. It is at this point that, in Mr. Cavanagh's submission, the Ombudsman's decision, in his words, "comes off the rails". Having resolved the main point of contention in the appellants' favour, paragraph 62 proceeded to state as follows:

"The Board submits that Contingent Assets cannot be put in place by reference to a retrospective position as at the date of the Contingent Asset certificate. I agree. Section 30(b) of the Contingent Asset Appendix to the PPF Determination, which is headed 'What are the certification and documentary requirements for a Type A Contingent Asset', states 'The certificate must contain the following information…Date on which the guarantee came, or will come into effect, which must be no later than 1 April 2011.' The Guarantee was entered into on 28 March 2011 and this is confirmed as the effective date on the Contingent Asset certificate. As I have stated above it is common ground that in October 2010 TT Electronics plc became the sole employer, in relation to the Scheme, by way of a scheme apportionment arrangement. Thus TT Electronics plc was purporting to guarantee the liabilities of employers who no longer participated in the Scheme at the time the guarantee was given and so, as submitted by the Board, the guarantee had no effect because TT Electronics was effectively guaranteeing its own liabilities. The Trustees contend that the employer information was properly updated for the purposes of a forthcoming levy year, by the submission of the scheme apportionment arrangement, but that the Board's decision has the effect of applying the updated information in respect of the current levy year. The Trustees also submit that the updating of the employer information has been taken into account in an inconsistent manner. Because it is not permissible to have regard to the effect of the scheme apportionment arrangement when considering the calculation of the risk based levy but it is when considering the status of the Contingent Asset."

Mr. Cavanagh says that the Ombudsman's agreement with the Board's submission contradicts her earlier conclusion. It can only be right if one ignores what the Ombudsman has already said at paragraph 61. Even Mr. Giffin (for the respondent) accepts that the Ombudsman's statement that "TT Electronics was effectively guaranteeing its own liabilities" was perhaps not an ideal formulation. He ventures to suggest that it might be more accurate to have said that "the only liabilities being guaranteed were ones of a kind now owed exclusively by TT Electronics plc and not by the primary obligors under the guarantee". But he adds that what the Ombudsman meant is plain enough and, he says, was indisputably correct.

23. Returning to the determination, paragraph 63 states as follows:

"In my judgment the Trustees' arguments about the effect of the scheme apportionment arrangements are misguided. As I have stated above there is no mechanism to [the 'to' there seems to be redundant] in the PPF Determination to accommodate a change of employer at any point during the levy year. Therefore, the employer identified on 31 March each year must, for the purposes of the risk based levy, remain as the employer for the entire year. Equally an Employer cannot be changed, mid way through the year, to render a guarantee effective."

That paragraph (paragraph 63) is said by Mr. Cavanagh to be mystifying. He says that it can only be correct if one ignores the Ombudsman's earlier determination at paragraph 61 that "the Employer consisted of the participating employers as identified on Exchange at 31 March 2010 and the Board needed to assess whether the insolvency risk of those participating employers, and thus the risk of compensation being payable by the Board, would have been reduced by the Contingent Asset submission made on 28 March 2011". It is said by Mr. Cavanagh that the Ombudsman's recital of the reality of the situation effectively ignores the artificial assumption that one is addressing the position of the participating employers as at 31^st March 2010. Even Mr. Giffin accepted (at paragraph 58 of his skeleton) that the statement that the levy determination contained "no mechanism … to accommodate a change of employer at any point during the levy year" is a puzzling statement. As Mr. Giffin observed, the present issue has nothing to do with changes during the levy year (1^st April 2011 to 31^st March 2012). Rather, the issue is at what point prior to the levy year a particular test has to be satisfied.

24. Returning to the determination, at paragraph 64 the Ombudsman says:

"I cannot criticise a published policy of the Board, I may only check it is applied fairly and that the individual circumstances of the case have been considered both in terms of the stated policy and whether there are any reasons to depart from the policy. Established case law indicates that I may only interfere with the exercise of a discretion where the decision-maker has not acted as it should do."

Mr. Cavanagh objects that the Ombudsman was not concerned with the exercise of any discretion but (as the Ombudsman had correctly observed in paragraph 52 earlier in her determination) her role was to consider whether the Committee's decision "was not reached correctly". In the circumstances, that was correctly said to translate "into determining whether the scheme's risk-based levy had been calculated in accordance with the terms of the PPF Determination". Mr. Cavanagh speculated that paragraph 64 might be what he described as a "boiler-plate" paragraph standard to all decisions of the Ombudsman.

25. The determination concluded, in terms of its reasoning, with paragraph 65, which was in the following terms:

"For the reasons given above it follows that I can see nothing that justifies my coming to a conclusion that I should remit this matter back to the Board for reconsideration."

At paragraph 66 the Ombudsman said this:

"Having done so, Regulation 16 of [the relevant regulations] makes it mandatory for me to determine what action the Board should take and remit the matter to the Board. Accordingly, I determine that the Committee's decision of 15 June 2012 was reached correctly."

That concludes the determination.

26. Mr. Cavanagh says that the Ombudsman's reasons are inconsistent and contradictory, and are therefore not fully or adequately articulated. At paragraph 6.1 of his written skeleton argument Mr. Cavanagh submits, on behalf of the appellants, that the determination erred in law on three grounds:

(1) The Ombudsman failed to follow her findings on the correct interpretation of the Levy Rules to a valid conclusion.

(2) The Ombudsman misdirected herself in law as to the nature and effect of the contingent asset; and

(3) The Ombudsman erred in law in not giving sufficient reasons for her determination that the Reconsideration Committee's decision was reached correctly.

In his oral submissions Mr. Cavanagh acknowledged that these three grounds effectively amounted to the same thing. For reasons which were more fully spelt out at paragraphs 6.2 to 6.10 of his written skeleton argument, Mr. Cavanagh submits that, put bluntly, once the Ombudsman accepted - he says correctly - that "Employer" for the purpose of rule D2.3(2) meant the scheme employers as at 31^st March 2010, the Ombudsman was bound to find that the Contingent Asset relied upon reduced the Insolvency Risk.

27. In short, Mr. Cavanagh says that the Ombudsman performed a complete U-turn after paragraph 61 of her determination and, moreover, that it is impossible to discern why she did so. In addition, the Ombudsman is said to have erred in law, and to have misdirected herself, in finding that the Contingent Asset should be disregarded because the principal employer was (1) "purporting to guarantee the liabilities of employers who no longer participated in the scheme at the time when the guarantee was given and (2) therefore "effectively guaranteeing its own liabilities". He says that the correct approach was that outlined in paragraphs 59 and 60 of the determination, which Mr. Cavanagh summarises as follows:

(1) Rule A2.3 provided that the calculation of the levy should be carried out on the footing that the Employer consisted of the participating employers as at 5pm on 31^st March 2010, regardless of whether, in reality, those employers had ceased to be participating employers at some later date during the financial year;

(2) Rule D2.3 further provided that any Contingent Asset put in place before the deadline on 31^st March 2011 should be taken into account insofar as it appears to have the effect of reducing the risk of compensation payable by the Board in respect of the Employer, as identified;

(3) Accordingly, the Levy Rules required the Board to consider whether the Contingent Asset provided by the Principal Employer had the effect of reducing the Insolvency Risk of the scheme on the basis that the relevant employers were the deemed employers (i.e. the participating group companies) at 31^st March 2010;

(4) The only possible answer to the foregoing question was in the affirmative; and

(5) It therefore followed necessarily from the Ombudsman's conclusions on the issues of interpretation that the Board had erred in law because the Contingent Asset reduced the Insolvency Risk of the scheme, and this should have been reflected in a reduction in the amount of the levy.

On this basis, the Principal Employer was not, for the purposes of the Levy Rules, purporting to guarantee the liabilities of employers who no longer participated in the scheme at the time the guarantee was given.

28. Further, and alternatively to the foregoing submissions, the Ombudsman was said to have erred in law in not giving sufficient reasons for her determination that the reconsideration decision was reached correctly. The Ombudsman was said to have a duty to give reasons for her determination. The reasons given must be both intelligible and adequate, and must allow the reader to understand why the matter was decided as it was. Reliance is placed upon observations of Lord Brown of Eaton-under-Heywood, speaking for the House of Lords, in the case of South Bucks District Council v Porter (No 2) [2004] UKHL 33; [2004] 1 WLR 1953 at paragraph 36. I quote:

"The reasons for a decision must be intelligible and they must be adequate. They must enable the reader to understand why the matter was decided as it was and what conclusions were reached on the 'principal important controversial issues', disclosing how any issue of law or fact was resolved. Reasons can be briefly stated, the degree of particularity required depending entirely on the nature of the issues falling for decision. The reasoning must not give rise to a substantial doubt as to whether the decision-maker erred in law, for example by misunderstanding some relevant policy or some other important matter or by failing to reach a rational decision on relevant grounds. But such adverse inference will not readily be drawn. The reasons need refer only to the main issues in the dispute, not to every material consideration … A reasons challenge will only succeed if the party aggrieved can satisfy the court that he has genuinely been substantially prejudiced by the failure to provide an adequately reasoned decision."

Mr. Cavanagh submits that, having correctly directed herself as to the interpretation of the Levy Rules, the Ombudsman does not, in paragraphs 62 to 64 of the determination, give intelligible and adequate reasons as to why the approach outlined in paragraphs 59 and 60 of the determination should not be followed in the present case. As presented, the conclusion reached by the Ombudsman is said not logically to follow from her findings on the interpretation of the Levy Rules. It is therefore said that it is not clear to the appellants why, having accepted that the Board was in error in its interpretation of the Levy Rules, the Ombudsman was still able to conclude that the reconsideration decision was reached correctly. In other words, having found that, for present purposes, "Employer" means the scheme employers as at 31^st March 2010, the Ombudsman did not explain why she had departed from her own interpretation of "Employer" (and she did not even acknowledge that this is what she had done). Insofar as that reasoning is explicable, it is said to be an error of law for the reasons previously advanced.

29. In view of the above, Mr. Cavanagh respectfully invites the court to:

(1) allow the appeal on the basis that the determination is in error of law;

(2) declare that, on the correct interpretation of the Levy Rules, the Board was required to take into account the Contingent Asset when calculating the amount of levy payable by the appellants in respect of the levy year 2011/2012;

(3) direct that the invoice issued to the appellants by the Board dated 27^th September 2011 be revoked; and

(4) direct that the invoice issued to the appellants by the Board dated 27^th September 2011 be replaced with one calculated in accordance with the terms of the declaration outlined in (2) above.

30. Permeating the whole of the appellants' argument is the submission (which, it is said, was accepted in terms by the Ombudsman, but then effectively ignored by her) that the identity of the scheme employer was fixed for all purposes relevant to the assessment of the 2011/2012 risk-based levy as at 31^st March 2010. In Mr. Cavanagh's graphic phrase, it was "frozen in aspic" as at that date. This counter-factual assumption is then required to be carried through, and applied, to the evaluation of the Contingent Asset. It is said that the Ombudsman fell into error because she took the "Employer" for the purposes of the critical provision D2.3(2) as at the later (and irrelevant) date of 31^st March 2011. That submission is articulated at paragraph 4.12 of Mr. Cavanagh's skeleton. In summary, it is said that the Board had acted inconsistently, and incorrectly, in assessing the risk of insolvency by reference to the scheme employers as at 31^st March 2010, but in assessing the efficacy of the guarantee in terms of reducing that risk by reference to the principal (and sole remaining) scheme employer as at the later (and irrelevant) date of 31^st March 2011. In oral submissions Mr. Cavanagh placed particular reliance on the point developed at paragraphs 4.23 to 4.25 of his skeleton argument that the submission of the relevant data relating to the Contingent Asset did not involve the submission of any information in relation to the scheme employer, which had been properly (and exclusively) included within the scheme return. As to that, the relevant Measurement Time was said to be 31^st March 2010.
31. For the respondent Board, Mr. Giffin says that the point in this statutory appeal is ultimately a short one. He says that the appellants' case is that the amount of a levy that it was required to pay, and which was calculated by reference to risk, should have been substantially reduced on account of the giving of a guarantee even though that guarantee was, for all practical purposes, a commercially meaningless paper exercise which had no genuine impact whatsoever on any risk that actually existed. The Ombudsman rightly rejected that argument, and Mr. Giffin says that her decision should be upheld. Mr. Giffin says that following the October scheme apportionment arrangement, the appellants sought to reduce their levy by a wholly artificial device, in the form of a guarantee. He refers to the subject matter of the guarantee; and he then submits that it is immediately apparent that, from any realistic or commercial perspective, the guarantee was not worth the paper that it was written on. That is because it guaranteed obligations to make payments to the scheme when the whole point of the earlier transactions in October 2010 had been that the purported primary obligors (the 12 participating employers, other than the guarantor itself) had ceased to have any such obligations, save in what he describes as "the vanishingly unlikely event" of one of those companies becoming a scheme employer again (and no-one has ever suggested that there was the remotest chance of that happening in practice). Mr. Giffin says that it is impossible for the guarantee ever to have any effect whatever - he says that it is a pure device - yet the appellants' case is said to be that this meaningless device must lead to the result that the scheme should pay some £1.5 million less in levy than would otherwise be the case, a cost which, he says, by one means or another must ultimately fall on other levy payers (although Mr. Cavanagh disputes either the accuracy or the materiality of that assertion). Mr. Giffin submits that that absurd result does not flow from the terms of the Levy Determination, and that the Ombudsman had been right to reject it.
32. Mr. Giffin submits (at paragraph 35 of his written skeleton) that the guarantee fails to meet the Levy Determination requirements for a valid Contingent Asset on two grounds. One ground is that the guarantor was not an Employer's Associate, as required by para.6 of the Contingent Asset Appendix. He says that that argument was not put to the Ombudsman in precisely that form, but that a similar point was rejected by her and, hence, it is the subject of a Respondent's Notice. The other ground is that rule D2.3(2) was not satisfied. The Ombudsman accepted that argument and so that is the subject of the appellants' appeal. It is the latter point that Mr. Giffin addresses first in his written skeleton argument since it is said to be the most straightforward way of looking at the case.
33. The point that rule D2.3(2) was not satisfied is addressed at paragraphs 36 to 45 of Mr. Giffin's skeleton argument. He first reproduces the requirement of rule D2.3(2). That requires the Board to conclude that the Contingent Asset reduces "the risk of compensation being payable from the Board in the event of an insolvency event occurring in respect of an Employer in relation to the Scheme".
34. The appellants say that the primary obligors under the guarantee were "Employers in relation to the Scheme" because the identity of the scheme employers had to be taken as at 31^st March 2010 (when the listed companies were indeed still scheme employers). The Ombudsman accepted that. The Board contends that she was wrong to do so for the reasons that arise under the Respondent's Notice point. But supposing for the moment that the companies whose obligations were guaranteed did indeed fall within the words "Employers in relation to the Scheme", Mr. Giffin says that it was still necessary, before a Contingent Asset could be recognised, for the Board to conclude that the guarantee reduced the risk of PPF compensation being payable if one or more of those companies became insolvent. Suppose, Mr. Giffin says, that one of those companies (say, WT Henley Limited) were to become insolvent after the guarantee was given, would the existence of the guarantee, Mr. Giffin asks rhetorically, then reduce the risk of PPF compensation being payable? His response is that of course it would not. Since it is overwhelmingly likely that WT Henley would owe no debt to the trustees of the scheme, the guarantee could not, and would not, be called upon. The financial position of the scheme would remain exactly the same as if the guarantee had never been given. That is said to be the only reasonable view of the facts; and it is certainly one which the Board, and the Reconsideration Committee, were entitled to take (bearing in mind that rule D2.3(2) calls for an exercise of judgment by the Board, and that the Ombudsman only has power to interfere if the Reconsideration Committee's decision was not reached correctly).
35. The Ombudsman held (in paragraph 62 of her determination) that the guarantee had no effect because it purported to guarantee the liabilities of employers who no longer participated in the scheme. That is said to be absolutely right. It was certainly not a conclusion that involved any error of law on the Ombudsman's part. Mr. Giffin acknowledges, as I have previously mentioned, that the Ombudsman's statement that TT Electronics plc was "effectively guaranteeing its own liabilities" is perhaps not an ideal formulation, and that it might be more accurate to say that "the only liabilities being guaranteed were ones of the kind now owed exclusively by TT Electronics plc and not by the primary obligors under the guarantee". But, as I have also previously mentioned, what the Ombudsman really meant is said to be plain enough, and is said to have been indisputably correct. Although he did not seek to do so, Mr. Giffin can derive some support for his submission from what is said by Mr. Cavanagh in his recital of the background facts at paragraphs 4.1 through to 4.5 of his written skeleton. There Mr. Cavanagh recognises that it was the scheme apportionment arrangement, and not the guarantee, which had the effect of reducing the insolvency risk associated with the scheme, albeit that (because of the relevant Measuring Time for ascertaining the Employer for the purposes of the Levy Rules), this change could not be taken into account when assessing the risk-based levy for 2011/2012.
36. Mr. Giffin's alternative argument, raised by the Respondent's Notice, was described by Mr. Cavanagh as "the linguistic point". It was developed at paragraphs 46 to 61 of the respondent's skeleton; and Mr. Giffin addressed me on the point for 20 minutes after the short adjournment yesterday afternoon. Shortly stated, the argument is that the default position Measuring Time is normally 31^st March 2010; but that is merely the prima facie, and default, Measuring Time. In relation to (and thus for the purpose of evaluating) a Contingent Asset, the relevant Measuring Time is said by Mr. Giffin to be one year later, namely 31^st March 2011. The point advanced by Mr. Giffin, on which the guarantee was rightly rejected by the Board, is that when it was put in place in March 2011, the companies listed in it as primary obligors were not, in fact, scheme employers. There were no scheme employers at that date other than the guarantor itself. Accordingly, if the question of who was a scheme employer had to be asked as at 31^st March 2011, it would follow that (1) paragraph 6 of the Contingent Asset Appendix was not satisfied, because the guarantor would not be an Employer's Associate, and (2) there could be no reduced risk of compensation on an insolvency event "in respect of an Employer in relation to the Scheme", as required by rule D2.3(2). The Board only made the second of these points at the earlier stages of the process but, in fact, they are said to be two facets of the same point.
37. The Ombudsman rejected this argument for the reasons that appear at paragraphs 56 and 59 of her determination. She held that the identity of the "Employer" for the purposes of the levy determination must be judged at a single time for all purposes, and that the time in question was 31^st March 2010. Mr. Giffin objects that the Ombudsman has thereby failed to read the levy determination correctly. Under rule A.1 "Employer" bears the same meaning as in s.318 of the 2004 Act, but the identity of the employer in relation to a member is to be assessed by reference to data which has been submitted in accordance with rule A2.2. Going to rule A2.2(1), and subject to immaterial details, this means that the information is held on the Exchange (which is the Pensions Regulator's system for holding information about pension schemes) at the "relevant Measurement Time". So who is an Employer for the purposes of the levy determination depends on who is recorded as an employer on the Exchange "at the relevant Measurement Time". The companies listed in the guarantee were recorded as employers on the Exchange as at 31^st March 2010; but they were not so recorded as at 31^st March 2011 because they had ceased to be employers some five months previously, and the Exchange reflected that fact. As the very use of the phrase "the relevant Measurement Time" in rule A2.2(1) is said clearly to indicate, the date to be used will not be the same for all purposes. Rule A2.3 says that "in relation to Contingent Assets" the Measurement Time is 31^st March 2011 (and not 31^st March 2010).
38. When applying paragraphs 4(5) and 6 of the Contingent Asset Appendix (which is the Employer's Associate requirement), and when also applying rule D2.3(2) (which is the risk reduction requirement), one is undertaking an exercise "in relation to Contingent Assets". All of those provisions are said to relate exclusively to Contingent Assets, and the whole issue is said to be whether to recognise a Contingent Asset. So, Mr. Giffin says, the relevant Measurement Time at which to apply the definition of "Employer" was manifestly 31^st March 2011, and not that date one year earlier. That is said to be exactly as one would expect. All other aspects of the validity of a Contingent Asset submitted in March 2011 would certainly be judged as at that date. For example, was it in the right standard form? Where was the guarantor domiciled? Are the two companies, in fact, associated, etc? Why, Mr. Giffin asks, should the question of whether the guarantor was guaranteeing the obligations of an associated company which was a scheme employer be any different? Again, the purpose of the levy determination allowing the submission of Contingent Assets up to 31^st March 2011 is said to be to allow real risk reduction measures; and that purpose is said to be best fulfilled by testing all the relevant requirements as at that time.
39. The Ombudsman gave two reasons for rejecting that argument. At paragraph 59 she said that the levy determination contained "no mechanism … to accommodate a change of employer at any point during the levy year". As I have previously mentioned, Mr. Giffin finds that to be a puzzling statement. The present issue is said to have nothing to do with changes during the levy year (of 1^st April 2011 to 31^st March 2012). Rather, the issue is said to be at what point prior to the levy year a particular test has to be satisfied. So far as that is concerned, the "mechanism" which is said to accommodate changes (if that is how one wishes to look at it) is that the definition of "Employer" contemplates the concept of the "relevant" Measurement Time, so the relevant date may differ for different purposes. If different dates have to be looked at, and the identity of the scheme employers has changed in the meanwhile, then that change will be reflected in the outcome. The Ombudsman's other point (made at paragraph 56) was to say that the levy determination made clear that the Measurement Time was "simply the date for submission of various pieces of information". If the Ombudsman thereby meant that the Measurement Time was merely an administrative deadline (for example, for submitting a Contingent Asset certificate), she was simply wrong. The Measurement Time does indeed serve as a deadline for various purposes; but it is also, for many purposes, the date at which the Board has to assess various matters. That is said to appear most clearly from rule A2.1:

"For calculating the Levies, the Board shall use data which has been Submitted at the relevant Measurement Time except where expressly provided otherwise in these Rules."

But, Mr. Giffin says, he could make similar points about, for example, rules A6.1, E2.1, E3.6 and E4.1. It follows, Mr. Giffin says, that the guarantee simply did not satisfy the definition of a Contingent Asset at all. For all of those reasons, the respondent Board submits that the appeal should be dismissed.

40. Those were the arguments, which I have fully taken into account in arriving at my decision. Ultimately, as Mr. Giffin says, the point is a short one. The issue arises because of the policy decision taken by the Board to desynchronise the dates by reference to which (1) risk is assessed and (2) account falls to be taken of risk reduction activity. I remind myself that this is an appeal, and that it should only be allowed if the Ombudsman's determination is either (1) wrong or (2) unjust because of a serious procedural or other irregularity in the proceedings before her.
41. I accept Mr. Cavanagh's criticisms of the Ombudsman's decision. It does seem to me that her determination is unintelligible and inadequately reasoned, in the sense that it does not enable even the informed reader to understand why, having accepted that the scheme "Employer" was to be identified as at 31^st March 2010, she nevertheless proceeded to determine that the Reconsideration Committee of the respondent Board had correctly concluded that the relevant Contingent Asset Submission did not meet the conditions of the Contingent Asset Appendix to the respondent's 2011/2012 levy determination, and to have therefore correctly upheld the original calculation of the risk-based levy for the appellants' pension scheme.
42. I reject Mr. Giffin's argument (at paragraphs 36 to 45 of his skeleton) that the respondent had been entitled to conclude that there had been no reduction in the risk of compensation being payable by the Board (within rule D2.3(2)) even if one supposes that the 12 employers whose obligations were guaranteed did fall within the phrase "Employer in relation to the Scheme" because the relevant Measuring Time should be taken to be 31^st March 2010. The respondent's argument is that the guarantee from the principal employer failed to reduce the risk of compensation being payable from the Board in the event of an insolvency event occurring in respect of a scheme employer because, by the time the guarantee was given, all of the employers whose obligations were guaranteed had already discharged their liabilities to the scheme and had ceased to be scheme employers. Therefore, the guarantee could not, and would never, be called upon, and it could have no financial effect. The fallacy of that argument, as it seems to me, is that if (which this argument assumes) the identity of the scheme Employer is to be fixed (whether in aspic or otherwise) as at 31^st March 2010, then the question which rule D2.3(2) requires the respondent to address is whether the guarantee reduces the risk of it having to pay compensation in the event of an insolvency event occurring in relation to that - and I emphasise "that" - Employer. The question posed by rule D2.3(2) does not fall to be answered in the real world, but in the artificial (or hypothetical) world dictated by the counter-factual assumption that the 12 entities whose scheme liabilities are the subject matter of the guarantee given by the principal employer were still scheme employers.
43. In the course of his address to the court, I asked Mr. Giffin to identify the "Employer" to which the respondent had been required to apply its mind for the purposes of rule D2.3(2). His response (as it had to be for the purposes of the instant submission) was that the Board had to look at the position in the real world: There had to be a genuine and actual reduction in the risk of compensation being payable by the Board. The difficulty with that answer is that it requires one to adopt a Measurement Time other than 31^st March 2010 for the purposes of identifying the scheme Employer. I accept the point made by Mr. Cavanagh in his reply that if the appellants are right in their contention that the Employer for the purposes of rule D2.3(2) is fixed as at 31^st March 2010, then the respondent's arguments under this head all fall away. That is because those arguments all assume that the identity of the Employer is not fixed as at 31^st March 2010. I accept Mr. Cavanagh's submission that the parties to this appeal proceed from different standpoints; and that the logical starting-point from which to evaluate the correctness of the Ombudsman's determination is to address the submission (at paragraphs 46 to 60 of Mr. Giffin's skeleton argument) that, at the time it was put in place in March 2011, the companies listed in the Schedule as the primary obligors were not, in fact, scheme employers because, as a result of the scheme apportionment arrangement effected the previous October, the guarantor was the only remaining scheme employer.
44. It is at this point that I part company with Mr. Cavanagh. I reject his submission that the identity of the scheme Employer is to be taken as at 31^st March 2010 for all - and I emphasise "all" - purposes of levy assessment. I accept the competing submissions of Mr. Giffin, which seem to me to accord both with the wording of the relevant rules and their underlying purpose, which was to desynchronise risk assessment and risk reduction. In my judgment, when it comes to considering and evaluating Contingent Assets, the Measuring Time is (by rule A2.3(1)) 31^st March 2011; and this is the relevant Measurement Time for the purposes of rule A2.2(1), and thus is the time to be adopted when identifying the scheme Employer in relation to Contingent Assets. The 12 associated companies of the principal employer who are identified as the primary obligors in the Schedule to the relevant guarantee were correctly recorded on the Exchange as the scheme employers as at 31^st March 2010, but not as at 31^st March 2011, having ceased to be scheme employers in October 2010: contrast Bundle B, divider H, pages 604 and 607. On this basis, in my judgment Mr. Giffin is right to say that the guarantee did not fulfil the condition set out in paragraph 6(a) of the Contingent Asset Appendix to the 2011/2012 levy determination because, at the time the guarantee was given, and also at the relevant Measurement Time (31^st March 2011), the guarantor was the only scheme employer, and thus was not an associate of a scheme employer.
45. I agree with Mr. Cavanagh that since the respondent succeeds on its argument in relation to paragraph 6, it is unnecessary for it to rely on the requirements of paragraph 31(b) of the Contingent Asset Appendix. It would also seem to me that once it is held (as I do) that the relevant Measurement Time, for the purpose of evaluating the Contingent Asset shifts from 31^st March 2010 to 31^st March 2011, then (for the reasons given by the Ombudsman, as explained by Mr. Giffin at paragraphs 36 to 45 of his skeleton argument) the respondent was right to conclude that rule D2.3(2) was not satisfied; and the Ombudsman was also right to determine that the Reconsideration Committee's decision had been reached correctly. I should make it clear that I am not concerned with the fairness of this result, but merely its correctness.
46. I therefore conclude that whilst the Ombudsman's determination was inadequately, and in some respects incorrectly, reasoned, her determination was correct. I therefore dismiss the appeal.
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