Upper Tribunal upholds contribution notice and increases sum due from director

The Upper Tribunal has upheld a contribution notice from the Pensions Regulator issued to a director of the sole sponsoring employer of the DB scheme.

The Regulator determined that a contribution notice be issued against the director as party to an act which met the material detriment test. The director referred the matter to the Tribunal claiming that her lack of involvement in the decision-making process meant she was not “party to” the various acts considered of material detriment to the scheme. 

The Regulator issued a press release on August 6, 2025, detailing how various repayments to the scheme (totalling over £2m) have been made following action taken, dating back to 2023, against family members connected with the sponsoring employer.

Background

Between 2008 and 2019, money had been extracted from the sponsoring employer by various means. Following an investigation prompted by the scheme’s independent trustee director, the Regulator issued warning notices to three other family members in addition to the director. Two of the family members agreed to pay a total of £2m to the scheme in October 2023, while the director’s brother agreed to pay over £220,000 before the Tribunal hearing and regulatory action against all three of them was discontinued.

The Regulator issued a contribution notice against the director, who was also an ultimate owner of the sponsoring employer through a shareholding in its parent company. Significantly, money had been extracted from the sponsoring employer by drawing down £800,000 against a bank lending facility. Around £360,000 of this money was used to buy out the director’s shares in the parent company.

The Tribunal found that the director had been party to a transaction that had caused a material detriment to the DB scheme. The scheme was in deficit (on all measures) and the sponsoring employer was making minimal deficit repair contributions with a long recovery plan because of its weakened financial state. 

The Regulator issued the director with a contribution notice of some £180,000 (plus a "passage of time adjustment") and the director referred the matter to the Tribunal claiming that she was not “a party” to any of the corporate decision making.

The Tribunal’s conclusion that the director was “a party”

The Tribunal held that the director was a party to the relevant act, which was the sale of her shares in the parent company and the associated financing arrangements. Her argument that "party to" should be construed narrowly as applying only where a person had procured the transaction or had a decision-making role was rejected. The Tribunal’s view was that the phrase should bear its ordinary dictionary meaning as: "a person who is concerned in an action or affair; a participant; an accessory".

Although the director did not personally approve or effect the drawdown from the bank or deal with the internal cash movements, she knew that the finance for the transaction would come from the sponsoring employer’s own resources, as this had been made clear in various communications. 

What about reasonableness?

The Tribunal considered that the director had a significant involvement in the transaction, being a willing seller of the shares in circumstances where she knew the purchase price would be financed by the weakened sponsoring employer. 

She was also a director of the sponsoring employer and was under a duty to act in its best interests, which she failed to do. The Tribunal noted that the director knew the scheme was in deficit, yet "went ahead without taking any professional advice" (beyond advice on the tax position) and "played a pivotal part in a transaction where the sponsoring employer increased its indebtedness in order to benefit her and other family members".

Consideration of the material detriment test

The Tribunal held that the sale of shares in the parent and associated financing arrangements met the material detriment test since it detrimentally affected in a material way the likelihood of accrued scheme benefits being received.

The relevant question was not whether the sponsoring employer’s accounts balanced but rather the impact these arrangements had (or might have) on the likelihood of scheme benefits being paid. Had the transaction not taken place, the sponsoring employer may have been able to draw down £800,000 from the bank to discharge some of its obligations to the scheme or invest in the business and increase the chances of the generation of future profits.

The amount sought under the contribution notice

The Tribunal emphasised that contribution notice liability is not akin to a financial penalty, nor is it a purely compensatory system. The primary objects of the regime are to protect pension schemes and reduce the risk of calls on the PPF.

The Regulator's case team had sought to impose a contribution notice of over £360,000 on the director on a joint and several basis with her brother. However, following settlements reached with the Regulator before the Determinations Panel hearing, the reasonable figure for the director’s contribution notice on a sole liability basis was £180,000. Various deductions were made for tax previously paid and amounts given to her children under a family agreement. The Tribunal considered it appropriate to cap the figure sought to the value of benefit the director received.

While the Tribunal agreed with the Regulator that directors should not be able to escape the "full rigours" of a contribution notice by dissipating proceeds, that was not the reality in this case. However, the Tribunal considered it reasonable to issue an increased contribution notice to the director for £245,749, representing the full value of benefits received and retained by her (that is, the proceeds of her share sale less the amounts she paid to her children and the tax payable on account of the sale of her parent company shares). 

That figure was adjusted to reflect passage of time from the date the director sold her shares and simple interest at a rate of 2 per cent above the Bank of England base rate was applied. 

Comment

This determination contains some important points:

1. The issue regarding joint and several liability was not pushed to its limit following settlement by the director’s brother.
2. The Tribunal took account of the actual value of the benefits received and retained.
3. The Tribunal ultimately imposed a higher contribution notice than the Regulator had.
4. The narrow definition of a ‘party to’ adopted should send warning signals to disengaged directors.