Pensions Update - Autumn 2011

A new session means new legislation and case law. In this month's bumper issue we cover: the Pensions Act 2011, Nortel, the benefits of an "ignorance" defence and various other practical and legal nuggets for you to store away for Winter.

Lehman/Nortel court of appeal Judgment

On 14 October the Court of Appeal upheld the decision of the High Court, handed down in December 2010, that where a Financial Support Direction (FSD) is issued against a target company by the Pension Regulator following an insolvency event, the costs of complying with it would rank as an expense of the administration or liquidation. The effect of this is that the expense must be paid before any distributions to preferred creditors, floating charges and unsecured creditors,thus giving the FSD super priority.

The Court of Appeal has held that, where the Pensions Regulator issues an FSD to a company after that company enters administration, the liability under any subsequent Contribution Notice will rank as an expense of the administration. The court held that, if a statute imposes a financial obligation that arises after the administration or liquidation of a company and that liability is not otherwise provided to be provable as an unsecured debt, it will rank as a necessary disbursement and an expense of the relevant insolvency process.

Therefore this decision needs to be a factor in any corporate restructuring strategies adopted where a distressed company operates a defined benefit occupational pension scheme.

Equity treats as done what ought to have been done

The High Court has given judgment in HR Trustees Ltd v Wembley plc (in liquidation) and another (still to be reported). The case centred around the validity of an amendment made to a scheme operating under standard Legal & General rules. The rules included a requirement for the trustee to "forthwith declare" amendments in writing. The key issue for the court was whether the trustees had indeed properly declared the amendments. In this case the amendment was designed to reduce the annual rate of increase applying to pensions in payment for future service from 5% fixed to LPI capped at 5%. The court concluded that the amendment was valid even without the declaration as the court applied the maxim that equity "treats as done that which ought to have been done". When we have more details on this case we will let you know its wider application.

Incapacity, its always better to ask further questions

The Pensions Ombudsman's determination in the case of Middleton is further proof of the need for trustees to fully investigate a member's condition before reaching a decision as on ill- health application.

Mr Middleton was a member of the NHS Pension Scheme. In 2008 he applied for ill-health early retirement on the basis that his depression and blackouts meant he was permanently incapable of carrying on his normal employment. The trustees, in accordance with the Schemes definition of incapacity, sought medical evidence with respect to the various different conditions. The medical evidence indicated that no firm diagnosis had been obtained in respect of the blackouts, and that the medication was working to alleviate the symptoms of depression. However, neither pieces of advice specifically addressed whether the conditions were firstly, incapacitating the member and more importantly, likely to be permanent to a normal retirement date. The Ombudsman found that the trustees had wrongly concluded that because the medical advice suggested that there was no firm diagnosis and currently no further need for the medical assessment, the member had not met the Schemes definition. The trustees had failed to fully address their minds and therefore the medical evidence to the question of permanence. The Ombudsman therefore redirected the trustees to reconsider the matter.

We are not surprised by the outcome of this case. While disputes to the Ombudsman in respect of illhealth early retirement are frequent, it is generally a failure by the trustees to apply the schemes rules properly and consider full medical advice that trips trustees up. The case further highlights the...