In a decision of interest to all schemes which provide defined benefits, the High Court has ruled that a section 75 debt may be assigned by trustees. This decision allows the scheme to be wound up, saving administration costs and providing certainty.
Facts of the case
The Singer & Friedlander Limited Pensions and Assurance Scheme (the Scheme) was a defined benefit (DB) occupational pension scheme. The scheme's employer, Kaupthing, Singer & Friedlander, was an Icelandic bank which went into administration on 8 October 2008.
The section 75 debt was certified at £74,652,000, but the trustee accepted a set-off resulting in a reduced section 75 debt of £73.94 million. To date, the trustee has received £60.26 million in dividend payments (81.5p in the £ on the reduced sum of £73.94 million). The administrators gave an estimate of the final dividend but indicated that the administration would not end before 2017.
The trustee wanted to wind up the scheme but could not do so while there was a possibility of further dividend payments in respect of the section 75 debt. However, brokers indicated to the trustee that they were interested in acquiring the debt owed by the employer. The trustee took professional advice which confirmed that selling the debt had a number of advantages including saving the scheme running costs and providing certainty.
The trustee applied to court for a direction that the section 75 debt due from the employer could be assigned. If so, the trustee sought a declaration that the proposed assignment was one that a reasonable and properly advised trustee could enter into in the exercise of its powers.
Mr Corbett, the representative defendant supported the trustee's application for a declaration that the section 75 debt is assignable, and did not appear. The Pensions Regulator (TPR) was asked to consider whether it would seek to be joined to the claim and make representations given the potential issues concerning its avoidance powers, but decided that it did not need to be joined and would not make representations.
Mr Justice Birss held that the section 75 debt could be assigned by the trustees of the Scheme and gave a direction that the assignment was something which a reasonable and properly advised trustee could enter into in the exercise of its powers.
In reaching this decision, the judge noted that, if considered before the introduction of the anti-avoidance powers, the section 75 debt would have been assignable. This followed from both the language of the Pensions Act 1995 and as a natural extension of the decision in Bradstock Group Pension Scheme Trustees Ltd v Bradstock Group plc and others  that a section 75 debt could be compromised. The assignment of a section 75 debt was of "lesser significance" than a compromise, since in a compromise an employer purports to discharge its ongoing liability for a section 75 debt, the employer remains liable for the whole debt where such debt has been assigned.
The Court noted that debts are generally capable of assignment and there was no express prohibition on the assignment of a section 75 debt and no apparent public policy reason why it should not be possible. In addition, as in Bradstock, if the assignment “secures the largest amount which the trustees reasonably and honestly believe can be secured towards the shortfall, then such a transaction would be furthering the purposes of section 75 and the legislation as a whole”.
The judge then considered whether the introduction of TPR’s anti-avoidance powers affected this conclusion. He noted that there was power under the Pensions Act 2004 (the 2004 Act) for TPR to direct the trustee not to enforce the section 75 debt, and that this seemed inconsistent with the concept that the debt could be assigned, as the trustee could not comply with such a direction where assignment taken place. However, he concluded that this was a potential inconsistency only, it did not arise in the present circumstances and it did not prevent the moral hazard regime as a whole from operating.
However, Mr Justice Birss went on to consider whether the fact that under the anti-avoidance powers, a person other than the employer could be made liable to contribute to the scheme's deficiency represented a fundamental change to the nature of the section 75 debt. Specifically, where a contribution notice has been issued to a third party, allowing the debt to be assignable creates the possibility of double recovery by the scheme. The court considered whether this issue might lead to the conclusion that the anti-avoidance powers were drafted on the assumption that the section 75 debt was personal to the trustee.
The court considered that the approach of David Richards J in Re Storm Funding Ltd  to the provisions of the 2004 Act and that his consideration of the different characteristics of section 75 debts and contribution notices was directly relevant. In that case, David Richards J held that, whereas section 75 imposes an ascertainable debt in certain circumstances, the 2004 Act creates a scheme whereby obligations are imposed by the exercise of discretionary powers by a statutory body, or on a reference, by a judicial body. Further, the additional obligations created by the 2004 Act do not create the same debt as the debt owed pursuant to section 75. These are two separate obligations. The purpose of the provision in the 2004 Act (under which any sum paid under a contribution notice is treated as reducing the amount of debt due under section 75) was to reduce the burden on the employer.
Mr Justice Birss considered that these conclusions in Storm Funding also apply to the relevant provisions of the 2004 Act, and undermine the idea that the existence of those provisions could be taken to have altered the nature of the section 75 debt itself.
He also concluded that the relationship between the anti-avoidance powers and section 75 was complex and
“give[s] rise to potential anomalies whichever way they are looked at. That is important because it undermines any attempt to construe the legislation in such a way as to avoid an anomalous result. It is unreal to find in [the relevant sections] of the [the 2004 Act] any manifestation of an intention by Parliament to alter the debt created by section 75…”
and accordingly, the section 75 debt could be assigned by the Scheme’s trustees.
This decision represents a welcome development for the Scheme’s trustees, as the Court has approved its winding-up before the conclusion of the employer's administration process. This means the costs of the winding-up will be reduced, resulting in more certainty regarding the eventual amount to be recovered. Such cost savings are an issue trustees can take into account in seeking to achieve the best outcome for their scheme members.
Other schemes may now follow suit and trade the section 75 debt where the employer has gone bust, as the Court has held such debts are assignable. In turn, the potential future marketability of section 75 debts could change the dynamic of negotiations in future restructuring exercises.
View the judgment.