Vol 8 (2011) - Issue 6

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The Pension Expenses Saga: The Pensions Regulator’s Super Priority Status Affirmed by the Court of Appeal

The English Court of Appeal has affirmed an earlier decision of the High Court, meaning that the costs of complying with Financial Support Directions ('FSDs') and Contribution Notices ('CNs') issued by The Pensions Regulator ('TPR') will continue to qualify as administration or liquidation expenses, payable in priority to unsecured creditors, floating charge holders, preferential creditors and the remuneration and expenses of the administrator or liquidator.

FSDs and CNs

An FSD may be issued by TPR, pursuant to the Pensions Act 2004, against a target company that is connected to a UK ‘sponsoring employer’ where the sponsoring employer is a service company in the group or is 'insufficiently resourced' and it is 'reasonable' to issue the FSD. The purpose of an FSD is to facilitate the reasonable financial support by the target company of the sponsoring employer’s defined benefit pension scheme, such support to be agreed in advance with TPR. If the target company fails to provide sufficient financial support or fails to comply with any approved support programme, TPR may then issue a CN, which requires a specified payment (up to the amount of the buy-out deficit) to be made into the scheme by that target company.

The original decision

The TPR sought to impose FSDs against certain target companies in the Nortel and Lehman Brothers groups. Many of the relevant target companies were already in administration in England by 2010, when TPR’s Determinations Panel decided that FSDs should be issued against them in relation to the Nortel and Lehman Brothers groups’ scheme deficits of GBP 2.1 billion and GBP 125 million respectively. The issuance of such FSDs is currently suspended pending references to the Upper Tribunal (Tax and Chancery Chamber). The administrators of the Nortel and Lehman target companies also applied to the High Court, which application was the subject of the appeal in question.

The Pensions Act 2004 confirms that a pension deficit on a full buy-out basis of the sponsoring employer (a section 75 debt) ranks pari passu with the employer’s other unsecured creditors. The question referred to the High Court related to the ranking of the costs of complying with FSDs (and any subsequently issued CNs) in the administrations of the insolvent target companies, a topic on which the Pensions Act 2004 is strangely silent. Accordingly, the question fell to be determined according to ordinary principles of English insolvency law.

In a controversial ruling in December 2010, Justice Briggs of the English High Court held that where an FSD or CN is issued after the on-set of administration (or liquidation where no administration is commenced), any payment that the target company is required to make as a result of the FSD or CN could not be admitted as a provable debt in the administration. Rather, the High Court held that such costs should be regarded as an expense of the administration or liquidation. Such expenses have priority over the claims of unsecured creditors, floating charge holders and the remuneration and expenses of the administrator or liquidator and effectively give the TPR a form of 'super priority'. The administrators of each of the relevant Lehman and Nortel target companies appealed against that decision and argued, in summary, that liabilities relating to an FSD or CN issued post-administration were either not payable at all or were provable as an ordinary unsecured debt in the administration.