Driving on an empty road to the sun

After nearly six years of regulatory action, the Pensions Regulator (the Regulator) has announced that it has reached a settlement with the parties to the Lehman Brothers litigation which it believes will enable the Lehman Brothers Pension Scheme (the Scheme) to pay full benefits to its 2,466 members. This represents a success for the Regulator in the use of its anti-avoidance powers.

In late 2008, the Scheme’s sponsoring employer entered insolvency proceedings along with the majority of companies in the Lehman Brothers group. The Scheme had a significant deficit at the time so the insolvency of its sponsoring employer meant that there was a significant risk that the Scheme would enter the Pension Protection Fund (PPF).

Two of the Regulator’s objectives are to protect the benefits of members of occupational pension schemes and to reduce the risk of situations arising which may lead to compensation being payable from the PPF. The Regulator therefore exercised its powers and sought to impose Financial Support Directions (FSDs) on six companies in the Lehman Brothers group. Broadly, the recipient of an FSD is required to put in place financial support for a pension scheme. The Regulator’s Determinations Panel decided that the six target companies had received a benefit from the Scheme’s sponsoring employer and that it was therefore reasonable for those companies to be required to provide support to the Scheme.

The six recipients of the FSDs referred the matter to the Regulator’s Upper Tribunal, arguing that it was not reasonable for the Regulator to impose the FSDs. The trustees of the Scheme also made a reference to the Upper Tribunal, arguing that additional FSDs should be issued to 38 other companies in the group. However, these proceedings were stayed for several years as litigation was carried out in the courts over different aspects of the process:

  • In June 2013, the Court of Appeal rejected claims by the 38 other group companies that the trustees were not “directly affected parties” who could make a reference to the Upper Tribunal and that the time limit for issuing FSDs to those companies had expired.
  • In July 2013, the Supreme Court determined that an FSD could be issued to an insolvent target and that liabilities relating to the FSD would be provable debts in the target’s insolvency.
  • Finally, in December 2013, the High Court found that if the Regulator issued Contribution Notices to parties who did not comply with the FSDs, the aggregate amount claimed under the Contribution Notices could exceed the Scheme’s section 75 debt.

Proceedings recommenced in the Upper Tribunal once this litigation had concluded. However, the Regulator announced on 19 August 2014 that the parties had reached an agreement under which certain companies in the Lehman Brothers group will pay an amount (estimated at £184m) to the trustees of the Scheme. The Regulator expects this amount to be sufficient to allow the trustees to buy out members’ benefits in full with an insurance company and therefore avoid the need for the Scheme to enter the PPF.

After several years of litigation, the settlement will be welcome news for the Regulator as it is now able to demonstrate that it has exercised its statutory powers in order to achieve two of its statutory objectives. Interim Chief Executive Stephen Soper commented that “the Regulator has increasingly been required to engage its anti-avoidance powers to secure the retirement benefits of members and protect the PPF. This case demonstrates that the Regulator’s anti-avoidance powers can be used effectively, even in highly complex international insolvency situations.” We will have to wait and see what impact this success has on the Regulator’s use of its anti-avoidance powers in the future.

This post was edited by Stephen Maynard. For more information, email blogs@gateleyuk.com.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.