DB pensions lose protected status in insolvency

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Provisions put in place by the Pensions Regulator to protect defined benefit pension schemes during company administrations, have lost their protected status following a Supreme Court ruling which now ranks them alongside unsecured creditors, reports accountants Northampton Harris & Co.
Financial Support Directions (FSDs) - issued by the Pensions Regulator to ensure companies provide financial support to their defined benefit pension schemes – will now be given the same priority level as unsecured creditors according to the Supreme Court, overturning two previous rulings of both the High Court and the Court of Appeal.
The decision, the culmination of three years of litigation, has come about in a case in which the European administrators of Nortel brought the issue to the Supreme Court (along with the administrators of Lehman Brothers) following the crystallisation of a $3.1bn (£2bn) claim from the UK pension scheme on insolvency.
It also provides clarity for both insolvency and pension professionals who were previously unsure of how liabilities under an FSD would rank if it was not in place at the start of the insolvency.
FSDs were first created under the 2004 Pension Regulations Act which gave the pension regulator the power to issue claims to assist defined benefit schemes in addressing funding deficits. The legislation was left unclear as to where FSDs would rank in an insolvency which gave rise to the current litigation.
The lack of clarity meant that where pension liabilities are significant, relative to the size of the supporting companies, this could result in general creditors receiving very little from administrations as all assets in insolvency are allocated to the pension on account of the FSD.
The Supreme Court could have chosen to overturn the previous rulings and decided that FSDs ranked as a ‘black hole’ behind all other interests and therefore any FSD claim would not receive anything. This result would have protected the general unsecured creditors, but left pension schemes with a large shortfall.
Jonathon Land, partner at PwC and adviser to the trustees of the Nortel Networks UK Pension Trust Ltd, described the ruling as the ‘fairest result’.
‘UK pension schemes and insolvency practitioners will be thankful they finally have clarity on this issue. This is also a great result for members of pension schemes and in some cases will make a real difference to their pension in the case of an administration. Insolvency practitioners will now also be able to more accurately estimate the financial impact of FSDs in UK administrations and ultimately make quicker distributions to all creditors,’ said Land.

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