Vol 11 (2014) - Issue 6

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Lehman Brothers: UK Pensions Regulator Forces Settlement

Former UK employees of Lehman Brothers, the US investment bank which collapsed in 2008, are expected to receive 'full retirement benefits' after companies in the same group agreed to a settlement with the Pensions Regulator (the 'Regulator') worth an estimated GBP 184 million, the UK Pensions Regulator announced in August 2014.
The settlement comes after nearly six years of investigation and legal proceedings, including last year's Supreme Court decision confirming the treatment of sums claimed by the Regulator under financial support directions ('FSDs') in cases involving insolvent companies.

Defined benefit (DB) pension schemes in the UK
DB schemes promise members a specific level of benefits at retirement, normally expressed as a fraction of final salary, depending on the number of years an employee works for his or her employer. The benefit payable is usually index-linked and carries generous survivor benefits.
Employees are usually required to make a fixed contribution to a DB scheme (typically around 5-10% of salary) and those contributions are invested, together with regular employer contributions, to provide the DB scheme with assets to pay the benefits. Where the assets are insufficient, the balance of cost for providing the generous benefits falls to the company that employs the relevant pension scheme members. A combination of (inter alia) falling gilt yields, improved mortality rates and an increased regulatory regime has made DB schemes increasingly costly and, for some employers, unsustainable (recent experience suggests that DB schemes can cost employers around 25-30% of underlying salaries).
From 2004, the UK government established the Pension Protection Fund (the 'PPF') in order to compensate (to a capped amount) DB scheme members whose employer had entered insolvency and so was unable to fund the benefits due under the relevant DB scheme.
Where a company that sponsors a DB scheme becomes insolvent, a statutory debt (broadly equivalent to the cost of buying the remaining benefits out with an insurance company) is triggered. Absent any bespoke security arrangements, the trustees of the DB scheme have a claim as ordinary creditors in a company's insolvency to recover that debt. Such claims are subject to the usual rules on insolvency and the trustees have no power to look to other members of the insolvent company's group for funds.

The Pensions Regulator
However, since 2004, the Regulator has had wide powers to seek financial contributions or support to meet a pension scheme deficit from companies connected to or associated with the pension scheme employer through FSDs and contribution notices ('CNs'). These powers prevent the 'moral hazard' that solvent companies in the same corporate group could leave the scheme without adequate funds, knowing that the PPF, which guarantees the pensions of members of DB schemes (to a certain level) in the event of employer insolvency, would cover the deficit.
By way of background, there are two different grounds on which the Regulator can issue a CN. The first is if the material detriment test is met in relation to an act or deliberate failure to act which occurred in the last 6 years. Broadly, this test will be met where the act or failure had a material detrimental effect on the likelihood of accrued scheme benefits being received. The second ground is where the main purpose, or one of the main purposes, of an act or deliberate failure to act (again, which occurred in the last 6 years) was to prevent the recovery of an employer debt that was (or might become) due, to prevent the debt becoming due or to compromise, settle or reduce that debt.