The Determinations Panel (DP) of the Pensions Regulator (TPR) has issued a contribution notice in relation to the Meghraj Group Pension Scheme.   

A contribution notice was issued against two individuals, Anant Shah and Rohin Shah for the part they played in entering into an agreement which had the effect of depriving the scheme's employer of the proceeds of sale received by one of its subsidiaries on the sale of a joint venture company.

Background

Meghraj Financial Services Limited (MFSL) was the sponsoring employer of a defined benefit pension scheme. In October 2014 MFSL went into liquidation.  At that date the scheme was estimated to have a buy-out deficit of £5.85 million.  The scheme entered a PPF assessment period.  Since 2001, MFSL had been the sole legal owner of Meghraj Properties Limited (MPL) which in turn owned shares in a joint venture company in India (the "Indian JV").  Following the sale of the Indian JV, in 2014 MPL paid the final tranche of sale proceeds not to its parent, the scheme employer (MFSL), but to a Jersey company that was a nominee company for Rohin Shah.   This was done pursuant to an agreement entered into by MFSL and MPL in 2012 (2012 Agreement) which provided that MFSL would have no claim to the sale proceeds of the Indian JV and that these would be paid to the Jersey nominee company for Rohin Shah.

TPR's Case Team argued that the 2012 Agreement had the effect of depriving the scheme employer, MFSL of the sale proceeds, thus putting them out of reach of the pension scheme.  As such it met the "material detriment" test under TPR's moral hazard powers as it had detrimentally affected in a material way the likelihood of accrued scheme benefits being received. The Case Team argued that TPR's DP should issue a contribution notice against Anant Shah who had signed the 2012 Agreement on behalf of MFSL and Rohin Shah who had signed it on behalf of MPL.  Anant Shah was "connected" with the scheme employer for the purposes of the moral hazard powers by virtue of being a director of MFSL.  Rohin Shah was "connected" with the MFSL by virtue of the fact that he was Anant Shah's nephew and therefore an "associate" of a director.

Anant and Rohin Shah argued that the 2012 Agreement simply recorded a pre-existing profit sharing agreement entered into in 2004 under which the profits from the Indian JV would be split 80/20 between Rohin and Anant Shah respectively (or entities they would choose).

Decision of TPR's DP

The DP accepted that Anant and Rohin Shah had split the profits broadly in accordance with an earlier agreement between the two of them which had not been recorded in writing.  However, it concluded that this had not been a legally binding agreement.  In particular, the DP noted that the accounts for the group of companies were not consistent with a legally binding profit sharing agreement having been entered into in 2004.  It followed from this that the 2012 Agreement was materially detrimental to the likelihood of benefits being received from the pension scheme, as it had changed a non-binding loose agreement between Anant Shah and Rohin Shah into a legally binding agreement that removed from MFSL its legal entitlement to the proceeds from the sale of the Indian JV.  They rejected an argument that the 2012 Agreement would not have affected what happened to the sale proceeds from the Indian JV on the basis that Anant and Rohin Shah regarded the 2004 agreement as legally binding, or at least "binding in honour".

On the question of reasonableness of imposing a contribution notice, the DP considered that Anant Shah had for several years failed to provide full information to the pension scheme's trustee as to the value of the Indian JV.  The DP accepted that Rohin Shah had no material involvement with MFSL at any time, or with the pension scheme after the appointment of a professional trustee in 2006.  However, it found that he had recognised the possibility that the scheme might obtain the sale proceeds from the Indian JV.  It considered that Rohin Shah ought to have taken legal advice on his entitlement before directing that the sale proceeds should be transferred out of the reach of the scheme.  The DP said it was an important feature of the case that Rohin and Anant Shah were part of a family business with a lack of formality over money flows and documents.  It said, "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."

The DP determined that contribution notices should be issued to Anant and Rohin Shah on a joint and several basis, for £3,688,108, being the amount of the sale proceeds that had been paid direct to the Jersey nominee company rather than the scheme employer.

Our thoughts

This case provides an example of how TPR approaches the "material detriment" test under 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.  The case also illustrates the issues that can arise when important business arrangements are operated on the basis of informal understandings that are not documented.  Scheme trustees need to ensure they have sufficient understanding of how the sponsoring employer's wider group is operated.

The DP's determination may not be the last word in this case, as it is currently under appeal to the Upper Tribunal.  This was a rare instance where the DP's decision was by majority rather than unanimous.  The dissenting member of the DP considered that TPR's case team had not discharged its burden of proof regarding whether 2004 arrangements had been legally binding.  He took into account the evidence before the DP that in the Oshwal community, to which Anant and Rohin Shah belonged, it is common to have informal arrangements that are implemented largely on trust but nevertheless considered binding.