Pensions Casebook - Lehman Brothers

This case summary forms part of the Burges Salmon Pensions Regulatory Casebook. We provide analysis including practical considerations and high level commentary

13 June 2022

Commentary / Practical Considerations

Litigation involving the Lehman Brothers Pension Scheme (the 'Scheme') and the effectiveness of Financial Support Directions (FSDs)

Payment of £184 million, representing the Scheme's deficit on the buy-out basis, was agreed – the largest sum paid to a scheme as a result of TPR action to date.

TPR viewed the case as a great success, as the Supreme Court found that liabilities under a Financial Support Direction (FSD) issued against an insolvent company would rank as a provable debt.

The judgment therefore confirms that FSDs are effective in an insolvency.

Case summary

(i) Facts and background

Lehman Brothers filed for bankruptcy on 15 September 2008.

This was followed by the insolvency of the majority of the Lehman Brothers group including the main sponsoring employer of the Scheme, Lehman Brothers Limited (LBL), a UK company.

In May 2010 TPR initiated regulatory action via a Warning Notice seeking the issue of FSDs to certain companies in the Lehman Brothers Group.

In September 2010 TPR's Determinations Panel decided it was reasonable to issue FSDs to six companies, but not to a further 38.

The six targets challenged this decision on the grounds that it was unreasonable and referred the matter to the Upper Tribunal. 

(ii) Summary of decision

Upper Tribunal proceedings were stayed following a number of legal challenges made by the target companies, including:

  • the status of an FSD against companies in administration.
  • whether the trustees are 'Directly Affected Parties' for the purposes of the Upper Tribunal Proceedings/whether the time limit for issuing FSDs against the 38 targets had expired.
  • whether recovery was limited to the s75 debt.

In resolving these issues the courts found that:

  • FSDs can be issued against insolvent companies.
  • FSD obligations can exceed, in aggregate, the section 75 debt owed to a pension scheme.
  • pension scheme trustees are 'Directly Affected Parties' for the purposes of the Pensions Act 2004, giving them the right to make appeals about the decisions of the Regulator.
  • the two year time limit for the Regulator to issue an FSD does not apply to directions which the Upper Tribunal may give regarding an FSD, or any subsequent order or appeal made on those directions.

The Supreme Court also held that a Support Liability under a FSD was a provable debt rather than an administrative expense.

A settlement of £184 million was agreed following these decisions.

(iii) Key legal principles

Arguably the most important decision of the Court was that Support Liabilities rank as provable debts.

The Pensions Act 2004 is silent on how FSDs rank in the insolvency of a target company.

The lower courts both held that Support Liabilities constituted expenses of an administration as they were not legal obligations existing at the commencement of an insolvency event.

On appeal the Supreme Court held that Support Liabilities were provable unsecured debts, overruling the lower courts by a unanimous decision.

Lord Neuberger argued that Support Liabilities could be deemed to have been incurred before an insolvency event (and so constitute provable debts) because the relevant company will have taken a number of steps prior to insolvency which (a) 'put it under some legal duty or into some legal relationship'; and (b) 'resulted in it being vulnerable to the specific liability', such that there was a 'real prospect' of that liability being incurred.

Analysis

This case demonstrates the Regulator’s commitment to initiating and pursuing regulatory action over an extended period and at all judicial levels in order to protect member benefits and minimise calls on the PPF.

The outcome is positive for members, and for sponsors of DB schemes generally (because the PPF is not being called on).

Key words

Financial Support Directions; Defined Benefit Scheme; Insolvency; Support Liability

Key contact

Clive Pugh

Clive Pugh Pensions Partner and Head of Pensions Regulatory Investigations

  • Pensions Regulatory
  • Pensions Services
  • Pensions Legal Advice 

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