Lehman subsidiaries could be forced to provide financial support to underfunded pension scheme

The Pensions Regulator had previously decided not to pursue the 38 affected companies after raising financial support directions (FSDs) against another six companies within the Lehman Brothers group in 2010. The company's pension scheme had a deficit of £121 million as of its 2008 valuation, according to the tribunal.

In its decision (52-page / 180KB PDF), the Upper Tribunal tax and chancery chamber said that those six firms and the pension scheme trustees were legally entitled to appeal the regulator's decision not to impose an FSD as they were "directly affected" by the decision. It also said that the two-year time limit under which the regulator had to issue an FSD against the companies only applied to its own administration process and so did not apply in this case. That time limit expired on 14 September 2010.

"The trustees have a clear duty to monitor the financial position of the scheme in order to come to a view as to whether its assets are sufficient to meet the members' current and future entitlements," the tribunal judges said. "In common with all trustees their primary duty is to preserve the Trust's assets and where the exercise of [the Regulator's] functions (such as the issue of a financial support direction) would potentially enhance the value of the scheme's assets they have a clear direct and personal interest in the outcome of any determination as to whether the powers would be exercised."

Since 2004 the Pensions 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. These powers are intended to prevent the "moral hazard" that companies in the same group could leave the scheme without adequate funds knowing that the Pension Protection Fund (PPF), which pays compensation to members of defined benefit pension schemes if their employers go insolvent, would have to cover the deficit.

"The Upper Tribunal has found that trustees are 'directly affected parties', and are therefore able to refer decisions of the Determinations Panel to the Upper Tribunal," a spokesperson for the Pensions Regulator said. "We welcome the clarification to this complex area of law."

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that given the circumstances of the case the decision was a "strange" one, that had effectively "given back powers" to pursue the 38 companies to the Pensions Regulator that it had "previously decided it wasn't interested in exercising". It remained to be seen how enthusiastic the regulator would be in pursuing actions "forced" on it in this way, he said.

"The Determinations Panel of the Pensions Regulator decided in September 2010 to issue a financial support direction against only six companies within the Lehman group - it gave up any attempt to pursue the remaining 38 possible targets," he explained. "Now the Upper Tribunal has, at the request of the pension scheme trustees, forced the Regulator's hand - despite a number of complex arguments to the contrary about time limits and the trustees' right to intervene."

In October last year the Court of Appeal ruled that the Pensions Regulator could have first claim over an insolvent company's assets on behalf of pension funds ahead of other creditors in certain circumstances, in a case involving Lehman Brothers and the telecommunications company Nortel Networks, also in administration. The Court said that the Regulator's claim would take priority if it had already begun action against a company over a pension scheme which is in deficit when the company becomes insolvent. The decision has been referred to the Supreme Court.

"The Lehman pensions saga is likely to drag on for some time still," Tyler said. "It won't be until next year that the Supreme Court decides whether financial support directions enjoy 'super priority' over other creditors. That decision will influence the practical steps the Regulator goes on to take."