The Pensions Regulator has today issued a Statement on its power to issue financial support directions (“FSDs”) against companies after an insolvency event has occurred. The Statement follows longstanding concerns of insolvency practitioners, which have arisen from ongoing court proceedings brought by the Lehman Brothers and Nortel administrators.


If a company is an employer participating in a pension scheme with a deficit and is either a “service company” or “insufficiently resourced”, the Regulator can issue an FSD (effectively a guarantee of any amount up to the buy-out deficit in the scheme) to any company participating in the scheme or to companies associated or connected with them. The Regulator must be of the opinion that it is reasonable to issue an FSD against a particular entity.

In the Lehman and Nortel proceedings both the High Court and Court of Appeal held that monies payable pursuant to an FSD issued after the commencement of administration fell to be treated as an “expense” in the administration. This result attracted significant negative comment on the basis that it suggests such an FSD would have “super priority”, ranking above both floating charge holders and unsecured creditors (but not fixed charge holders) in the insolvency process, and also ranking ahead of the administrators’ own remuneration. The administrators have appealed to the Supreme Court, who are not expected to hear the appeal until the spring of 2013.

The Regulator’s view

The Regulator says that the Statement is designed to allay fears expressed by the insolvency industry as to the impact of the court case. The key points are:

  • the Regulator is “acutely aware” of the importance of an effective restructuring and rescue culture, and has no wish to obstruct administrators;
  • if the Regulator considers an FSD to be appropriate, it has no intention of deliberately delaying its issue until after an insolvency event in order to take advantage of the post-insolvency priority ranking;
  • where an FSD is issued after an insolvency event but arises from facts which occurred prior to the insolvency event, a relevant factor in assessing what financial support is reasonable will normally be the position under insolvency law had the FSD been issued before the insolvency event;
  • in assessing the reasonableness of issuing an FSD the Regulator will have regard to creditors’ claims, which would include considering the return that the unsecured creditors would receive had the FSD been issued prior to the insolvency event, and this would be likely to result in a level of support which “achieves broad equity between the trustees of the scheme and unsecured creditors of the FSD recipient”;
  • in most circumstances the Regulator would not object to a subordination of the FSD liabilities behind the administrator’s reasonable remuneration, where a court application is made to vary the priority order of administration expenses to further the purpose of the administration.

The Regulator claims that it has seen no evidence that the court case has hampered the working of the insolvency and restructuring regime. The Statement also emphasises that the Regulator has only issued FSDs in four cases to date. It suggests that advisers may be able to obtain further comfort and certainty through due diligence, early contact with the Regulator or use of the Regulator’s formal clearance procedure.

The Statement is clearly a useful step in the right direction but it is questionable whether it provides a complete solution to insolvency practitioners’ concerns.

The full Statement can be found here.