When Is A Total Deficit Not A Total Deficit? Another Turn Of Events For Pension Contributions

Summary

On 18 December 2013, judgment of the High Court in England and Wales was handed down in a case relating to the insolvency of Lehman Brothers companies (In the Matters of Storm Funding Limited (In Administration) and Others [2013] EWHC 4019 (Ch)).

The judge held that, where multiple group companies are potential targets for the Pensions Regulator's power to issue contribution notices, the aggregate total of the contributions required by those notices was not limited to the amount required to fully fund the deficit in the relevant pension scheme under section 75 of the Pensions Act 1995 (Section 75).

Although such a limit still applies in relation to a single contribution notice, this judgment means that, where there is more than one target for the Pensions Regulator's powers, each of the contribution notices it could issue to those targets can be for the full amount of the Section 75 funding deficit.

Background: Protections for a Pension Scheme's Funding Position on Insolvency

Prior to the Pensions Act 2004, trustees could look to Section 75 of the Pensions Act 1995 as the key statutory protection on the insolvency of a sponsoring employer.

Section 75 is designed to provide protection for members of a defined benefit pension scheme when the sponsoring employer(s) of that pension scheme suffers insolvency. Section 75 does this by giving the trustees of such a pension scheme a statutory claim for the cost of securing the benefits promised by the pension scheme. That claim is against the entity that employed the members under the pension scheme. However, despite Section 75 being the key "last resort" protection for pension scheme benefits (and in the absence of any other security negotiated by the trustees), the statutory claim only gives trustees ranking as an unsecured creditor of the insolvent employer.

Members of such pension schemes were given added protection when the Pensions Act 2004 gave the Pensions Regulator powers to issue financial support directions (FSDs) and contribution notices (CNs). This gave trustees comfort that the Pensions Regulator could, through issuing an FSD or a CN, give them access to the financial resources of entities other than just the employers under the pension scheme. This power was designed primarily to be used against companies in the same group where assets of the group were held away from the sponsoring employer company and out of reach of the trustees of pension schemes.

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