Broadcaster Granada is appealing a High Court ruling in an attempt to recover £40m of gilts from one of its pension schemes, but lawyers say the case could jeopardise other employers’ non-cash contributions.
Non-cash and contingent assets are commonly used to improve scheme funding levels. Employers will set aside assets to provide income for schemes, along with an agreement that the assets will fall under the scheme’s ownership in the event of the employer becoming insolvent.
Late last year nature charity the RSPB set up a £56.4m contingent asset agreement as part of a wider effort to reduce its funding deficit.
If it does turn out that shareholder approval is required for some contingent assets, the industry-wide consequences could be profoundly serious
Anne-Marie Winton, Arc Pensions Law
The claimant Granada Group – a media conglomerate now a wholly owned subsidiary of ITV – set up a secured, unfunded, unapproved retirement benefit scheme in August 2000 to provide five of its executive directors with supplementary retirement and death benefits.
However, the company this year contended the contingent asset arrangements contravened the Companies Act 1985 as shareholder approval was not obtained when the scheme was set up and could therefore be voided.
Granada sought to recover gilts worth more than £40m that are charged as security for its obligation to the pension scheme.
Threat to contingent assets
It was judged that the company’s argument, which was dismissed, potentially had “significant adverse implications” for funded schemes, as many have an investment of non-cash assets.
The High Court ruled: “If the security arrangements are voidable at the instance of the employer, the settled contingent asset arrangements of many pension schemes will be thrown into doubt. This, in turn, could cast doubt on the reductions of the [Pension Protection Fund] levies.”
The High Court decided in favour of the trustees, but a spokesperson for ITV said: “ITV can confirm it has received leave to appeal and has done so.”
Anne-Marie Winton, partner at law firm Arc Pensions Law, said: “The risk is if the Court of Appeal finds shareholder approval is needed, it could well invalidate hundreds of [contingent asset deals].”
She added: “It’s no surprise that – with £40m of security at stake – attempts will be made to wiggle out of this commitment. However, if it does turn out that shareholder approval is required for some contingent assets, the industry-wide consequences could be profoundly serious.”
In the High Court ruling, one QC pointed out that “even if it was too late for the shareholders to ratify an existing scheme, it would still be open to the parties to revoke the existing schemes and replace them with fresh, identical schemes after obtaining shareholder approval”.
Mike Smedley, partner at consultancy KPMG, said even if the Court of Appeal ruled in Granada’s favour, he did not foresee a significant drop in the number of contingent assets being used.
“The only thing that would curtail them I think is if it’s a listed company and has to seek shareholder consent,” he said. “Not that they would say no, but I can see that listed companies wouldn’t want to go to shareholders with something like this that’s very much business as usual.”
