Vol 11 (2014) - Issue 3

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The Pension Saga Keeps Going: How Much is Too Much for a Contribution Notice?

Not six months after the long-awaited decision in In re Nortel GmbH (in Administration), the High Court has been asked again to consider the extent of the powers of the Pensions Regulator (the 'Regulator') under the Pensions Act 2004 (the '2004 Act'). This time, the question before the court was how much the Regulator can recover under a contribution notice ('CN') issued under section 47 of the 2004 Act.
The applicants in the recent case of Re Storm Funding Ltd (in Administration) were the administrators of 14 companies in the Lehman Brothers group. Three of the 14 companies are currently the subject of a financial support direction ('FSD') issued by the Regulator pursuant to section 43 of the 2004 Act. The Regulator has referred to the Upper Tribunal a direction to include the other applicants and another 26 group companies within the FSD, which is due to be heard in early 2014. This FSD requires them to provide financial support to a pension scheme which was established mainly to benefit the employees of another Lehman entity, Lehman Brothers Limited ('LBL'), who were seconded to companies in the group. When LBL entered administration, the deficit in the pension scheme was crystallised as a GBP 119 million debt owed to the trustee of the pension scheme by LBL under section 75 Pensions Act 1995 (the '1995 Act').
The application concerned a question of statutory construction as to whether, where the Regulator issues CNs to a number of targets in relation to the same non-compliance of an FSD, the aggregate amount demanded in those CNs and/or recovered under them can exceed the shortfall sum, as that term is defined in section 48(1)(a) of the 2004 Act (this is considered in more detail below). The administrators’ application was pre-emptive, in that no CNs have yet been issued by the Regulator to any of the applicants. It was brought, however, in order to enable the administrators to make interim distributions to unsecured creditors, while making adequate provision for the companies’ liabilities to the pension scheme.
David Richards J held, in summary, that the legislation does not purport to limit the cumulative amount that can be specified in or recovered under CNs relating to the same non-compliance other than the amount specified in each CN cannot exceed the shortfall sum, as provided by section 47 of the 2004 Act. This means that effectively the Regulator could claim the full amount of the shortfall sum from each of the targets.

The legislation
Before considering the reasons for the decision, it is helpful to understand how the recovery methods available to pension trustees and the Regulator under the legislation apply and are calculated.

Section 75 debt
Section 75 of the 1995 Act applies where a pension scheme is wound up or the employer enters an insolvency process, is otherwise wound up or ceases trading. The effect of such an event is that any deficit of the pension scheme calculated as at immediately before the event in question is treated as a debt owed by the employer to the trustee of the scheme (a 'section 75 debt').

FSD
An FSD may be issued by the Regulator under section 43 of the 2004 Act where the Regulator considers that the employer in a scheme is a service company or is insufficiently resourced. An FSD can be issued to one or more persons who are connected with or associates of the employer if the Regulator considers it reasonable for that person to provide financial support to the employer in respect of its pension liabilities.