Lehmans cut their losses in pensions dispute

Lehmans cut their losses in pensions dispute
Pensions analysis: Will the settlement of Lehmans’ financial support direction (FSD) dispute encourage other employers to settle? Lesley Harrold of Norton Rose Fulbright believes employers will undoubtedly be taking advice on how the outcome could affect their own cases.

Original news

Pensions Regulator announces settlement in Lehman Brothers financial support direction case, LNB News 19/08/2014 22

Action taken by The Pensions Regulator (TPR) and the scheme trustees during the Lehman Brothers FSD case has now resulted in companies within the Lehman Brothers group agreeing to buy out member benefits in full, which will avoid the scheme’s entry into the Pension Protection Fund (PPF). As at 30 June 2014 the estimated buy-out figure was £184m.

What is the significance of this settlement?

After six years of lengthy and sometimes complex litigation, this is a significant result for all concerned. Firstly, it demonstrates TPR’s doggedness in pursuing its objectives of both protecting members’ benefits and safe-guarding the PPF. Next, it is obviously an enormous relief for the members of the Lehman Brothers Pension Scheme that their benefits will be dealt with on the buy-out basis, which is the best they could have hoped for in the circumstances.

It is also significant for other schemes which currently have contribution notice or FSD cases progressing through the courts or before TPR. Lehmans’ agreement to the settlement on the buy-out basis may have been driven by the decision in Re Storm Funding Ltd (in Administration) [2013] EWHC 4019 (Ch), [2013] All ER (D) 217 (Dec) when the High Court ruled that TPR was not limited to the Pensions Act 1995, s 75 debt when seeking scheme support from multiple employer targets. No doubt other employers will be taking advice on how the Lehmans outcome could affect their own cases.

On a wider basis, it is significant to all schemes which pay PPF levies, as these won’t now be applied to pay Lehmans scheme members’ PPF compensation.

What does this mean for members of the Lehmans scheme?

They must be overjoyed. For the 2,466 scheme members this is a great outcome. Had the scheme gone into the PPF, many of them would have had only a percentage of their scheme benefits paid, as compensation at the 100% level is payable only to those who had reached normal pension age (NPA) at the PPF assessment date. Those who have not reached NPA are paid at the 90% level and are also subject to the compensation cap. As it is, all members will have their benefits secured on the buy-out basis, which is very good news for them.

What does this tell us about the regulatory stance of TPR?

TPR was justifiably jubilant in its press release when it trumpeted the settlement. The result vindicates TPR in its persistent stance over the last six years in the quest to achieve the best outcome for members, the PPF and PPF levy-payers. TPR will be pleased that its efforts have paid off—this settlement could well impact on the approach of other companies which are going through a similar process. TPR’s confidence in obtaining positive results in upcoming cases must now be boosted and such a positive result could well herald further victories for TPR as other employers recognise its willingness to fight on.

What are the practical lessons to be learned from this dispute and settlement?

It would be interesting to know exactly why Lehmans decided to settle at this level. It is likely the High Court’s Storm Funding decision had a big impact on the employers’ willingness to settle for £184m, the buy-out sum required. If the appeal of the High Court decision had not been discontinued following the settlement, the matter could have gone all the way to the Supreme Court. While a Supreme Court decision would have meant absolute certainty for the pensions industry in due course, perhaps Lehmans felt they stood to lose even more in the long run, as the scheme deficit would, in all probability, have continued to grow during the years when any further litigation was conducted, and the court process itself would have been very costly.

How does this fit in with the broader administration of Lehmans?

As far as insolvency practitioners are concerned, the crucial part of the whole Lehmans litigation saga was the Supreme Court’s decision which held that a liability under a FSD ranks along with unsecured creditors as a provable debt, rather than an expense of the administration having ‘super-priority’.

Further reading

If you are a LexisPSL subscriber, click the links below for further information on pensions issues:

Lehmans—financial support directions and contribution notices(Subscriber access only)

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First published on LexisPSL Restructuring and Insolvency

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.