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Insolvencies may now lead to potential recovery of an amount in excess of the debt under section 75 of the Pensions Act 1995 (s 75 debt). Joanne Etherton of Weil, Gotsthal & Manges advises on the implications of the decision in Storm Funding Ltd (in Administration)  EWHC 4019 (Ch),  All ER (D) 217 (Dec). In the Storm case, the administrators of 14 companies in the Lehman Brothers group (the applicants) applied for directions as to the potential liabilities of those companies to make payments to or for the benefit of the Lehman Brothers pension scheme. The Commercial Court decided that, on the true construction of the relevant provisions of the Pensions Act 2004 (PeA 2004), contribution notices might be issued under PeA 2004, s 47 to more than one qualifying target which, in aggregate, specified a sum in excess of the maximum shortfall sum, as defined in PeA 2004, s 48(2) and there might be recovered, under such contribution notices an aggregate sum in excess of the shortfall sum.
The case related to the interpretation of certain sections in the PeA 2004 and, in particular, the extent of the potential liabilities of the 14 applicant companies (but would have wider application for other targets too) to make payments to the Lehman Brothers Pension Scheme (the Scheme) under the Pensions Regulator’s financial support direction (FSD) and contribution notice (CN) regime.
The court was asked to consider whether, in circumstances where two or more contribution notices are issued, the aggregate maximum either specified in those contribution notices (assuming they are not issued on a joint and several basis) or recovered under them is limited to the shortfall sum which, broadly, is the amount of the Pensions Act 1995, s 75 ‘buy-out’ debt payable by the scheme employer (where such a debt has been certified) and the estimate of such debt where it has not been certified.
It is worth noting that CNs would only be issued in circumstances where there had been non-compliance with FSDs or, potentially, it had not been possible to reach agreement with the Pensions Regulator on the appropriate level of support to provide under FSDs.
Another important factor in this case was the fact that the buy-out deficit in the Scheme had increased significantly since the s 75 debt had been calculated as at 15 September 2008.
The court decided that CNs (for non-compliance with FSDs) could be issued to more than one target which in aggregate specify a sum in excess of the scheme employer’s s 75 ‘buy-out’ debt and there may be recovered from all entities to whom CNs are issued an aggregate sum in excess of the scheme employer’s s 75 debt.
It was accepted by the court (and this was not in dispute between the parties) that the maximum amount any particular target could be required to pay under a CN is limited to the amount of the scheme employer’s s 75 debt.
The court accepted the trustees’ and Pensions Regulator’s arguments that any limit on aggregate liability or recovery should derive from the requirement that the Pensions Regulator acts reasonably and that the case of the applicant companies involved reading express limitations into the legislation.
In addition, the court did not accept that s 75 debts and debts under CNs are essentially the same debt and that, given the insolvency law principle preventing double dipping, the pension creditor is not permitted to recover more than 100% of what is in substance the same debt.
The administrators of the 14 insolvent companies in the Lehman Brothers Group
While the companies know the individual maximum liability of any entity is limited to the amount of the scheme employer’s s 75 debt, they cannot estimate the likely liability of any particular entity as this will depend upon the actual liability of and/or actual recovery by the trustees from other targets. This position leads to significant uncertainty and the need for each of the companies to reserve for the full amount of the employer’s s 75 debt.
Direct or indirect creditors of the insolvent companies generally
There is continued uncertainty as to the amount of the pension liability applicable to the insolvent companies.
The trustees of the Lehman Brothers Pension Scheme as creditors in the insolvency
The possibility (subject of course to the outcome of any appeal) is that the total recovery under the Pensions Regulator’s CN regime may lead to the Scheme receiving more than the s 75 debt otherwise payable to the Scheme by the scheme employer. This will be of particular interest to the extent that the current deficit in the Scheme exceeds the amount of the s 75 debt as certified in September 2008.
The Pensions Regulator
The potential is for the Pensions Regulator’s powers to be used to help schemes where the buy-out deficit has increased since certification of a s 75 debt due from the scheme’s employers, provided the various requirements for issue of FSDs and CNs are met.
The case may also be an incentive for the Pensions Regulator to seek FSDs against multiple targets (and as many targets as possible) as this increases the potential recovery for the scheme.
The members of the Lehman Brothers Pension Scheme
If the aggregate amount payable or recoverable under multiple CNs had been limited to the scheme employer’s s 75 debt, the members would have had reduced benefits even if FSDs had led to the Scheme receiving payment of the employer’s s 75 debt amount from connected/associated entities. This is because that amount would not be adequate to enable members’ accrued benefits to be secured in full given the increase in the scheme’s deficit position.
This decision (subject to the outcome of any appeal) means the members may be more likely to receive their accrued benefits in full.
As a result of the uncertainties arising from this decision and the potential growth of pension liabilities depending upon various market-related factors such as annuity rates, administrators may be more enthusiastic to reach a settlement with the pension trustees earlier in an insolvency process rather than await the outcome of lengthy regulatory proceedings. As can be seen from Lehman, Nortel and BoxClever, this can take many years to reach a conclusion during which time the pension liability can remain volatile.
For more information on pensions and insolvency and pensions please click on the links.
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