Lehmans financial support directions: Who’s afraid of the big bad wolf (or the Pensions Regulator)?

Neil Bowden

We are beginning to see the Pensions Regulator flex his muscles.  The last six months have seen the first Contribution Notice served and an appetite for a fight with the Canadian courts in the Nortel determination.

The latest example comes this week with a determination to throw a Financial Support Direction around the Lehman Brothers group, presumably with the intention of maximising the potential recovery for the Lehman’s final salary scheme.

This however has thrown up an interesting and yet untested point (and got our restructuring lawyers rather excited!).  The issue is actually very simple.  Until the Regulator makes his determination there is no obligation to the scheme.  Even then a Financial Support Direction does not create a debt in itself.  Rather it is a requirement on the recipients to put in place appropriate “arrangements” to support the scheme.  It is only if arrangements are not put in place that an enforcement order would be served requiring a direct contribution to the scheme.  In Lehman’s case, the majority of the companies at the receiving end of the FSD are already in administration so presumably no arrangements will be put in place and enforcement orders will be served in due course.  The debt to the scheme would therefore be created some considerable time after administration began.

However, the tricky point is whether this debt will be admissible as a claim in the eventual winding up of the Lehman group companies.  Our feeling is that the Regulator is going to have an uphill battle.  This is because there is a well settled line of authority which says that if you are not a creditor at the time of the administration beginning, the claim is going to be ignored.

The question will therefore be whether the scheme can be considered a creditor at the relevant time because the Regulator had a contingent power to step in and serve a FSD?  The Liberty International case of earlier in the year makes this look unlikely.  The circumstances were rather different but they did look at the nature of such a contingent claim under a potential FSD and whether the trustees could be considered a creditor.  The conclusion was a resounding no.

Where would this leave the Pensions Regulator?  Feeling fairly frustrated I imagine.  FSDs were designed to allow the Regulator to potentially reach into the deeper pockets of other group companies when the actual employer turned out to be worthless.  However, if the Regulator has to get in there before a group goes down then it will need to be much more active in monitoring the financial affairs of companies and taking action where there might be a problem rather when there actually is a problem. 

Whether the Regulator has the resources to do this is another question! 

Neil Bowden is a partner at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

Read comments below or add a comment
  1. Visteon Pensioner says:

    And the Regulator walked away from a claim against Visteon Corp for US$800 million to support the collapsed Visteon UK because of the low value of Visteon assets. Visteon Corp is a global company and to now appears to have significant assets around the world, high value work committed by the mother company and two companies still operating in the UK.

    Our message to MPs in our campaign for investigation into Ford dumping our scheme and Visteon acting to dump liabilities is from our experience tPR is without any teeth. Visteon company trustees agreed to long term funding plans to recover the huge deficit inherited from Ford and made worse by Visteon whilst at the same time taking part in plans to close the business at the same time, having shifted their own pensions to a ‘new’ company.

    The Regulator has been interested and polite but nothing has happen – even with this level of scandal.


Leave a comment