In a decision published today, the Upper Tribunal rejected an application to strike out an appeal by the Trustees of the Lehman Brothers Pension Scheme against the decision of the Determinations Panel of the Pensions Regulator (TPR) not to impose a Financial Support Direction (FSD) on 38 companies in the Lehman Brothers Group (LBG).

Background

LBG collapsed in 2008. Many UK LBG employees were members of the Lehman Brothers Pension Scheme (Scheme). Lehman Brothers Limited (LBL), an LBG service company, was the sponsoring employer of the Scheme.

On 24 May 2010, TPR issued a warning notice seeking an FSD against 74 LBG companies (Targets). On 13 September 2010, TPR’s Determinations Panel (DP) issued a determination notice. The DP determined that an FSD should be issued against six Targets. These included LBG’s main UK operating companies and its US parent company, Lehman Brothers Holdings Inc. The DP decided not to issue an FSD against 38 Targets. Prior to the DP hearing TPR abandoned the case against 30 Targets.

The DP published its reasons for issuing FSDs on 21 September 2010. More details are available here:

The six Targets against whom the FSD was issued and the trustees of the Scheme (Trustees) both made references to the Upper Tribunal appealing against the DP decision. The Trustees appealed against the DP’s decision not to impose the FSD on the 38 Targets.

On 15 September 2010, LBG’s administrators applied to the Court for directions on whether liabilities under an FSD are: (i) provable debts; or (ii) an expense of administration; or (iii) neither. On 22 November 2010, the appeals to the Upper Tribunal were stayed pending the final determination of this application. Both the High Court and the Court of Appeal decided that FSD liabilities are an expense of administration. This has been appealed to the Supreme Court but the appeal will not be heard until May 2013. More detail on this application is available here:

In July 2011, the 38 Targets applied to the Upper Tribunal (i) to be joined as interested parties in the Trustees’ appeal; (ii) to lift the stay; and (iii) to strike out the Trustees’ appeal. The Upper Tribunal granted the joinder on 1 August 2011. On 28 October 2011, Sir Stephen Oliver QC lifted the stay to enable the strike-out application to be heard.

The Strike-Out Application

The issues raised in the strike-out application were:

  • that the Trustees had no right to appeal to the Upper Tribunal on the basis that only a “directly affected” person could appeal under s96 of the Pensions Act 2004 (PA 2004) and they were not “directly affected” persons;
  • if the Trustees had a right to appeal to the Upper Tribunal they were not entitled to refer a DP decision not to impose an FSD on the 38 Targets;
  • as the 24-month period in s43(9) PA 2004 for the DP to issue an FSD expired on 14 September 2010, the Upper Tribunal could not impose an FSD on the 38 Targets outside that period.

The Upper Tribunal Hearing

The Upper Tribunal rejected the strike-out application. Its conclusions on the questions raised were as follows:

First Question: “Can the Trustees appeal to the Upper Tribunal?”

This turned on whether the Trustees are “directly affected” persons under s96(3) PA 2004 as only a “directly affected” person can appeal to the Upper Tribunal. The Upper Tribunal decided the Trustees were “directly affected” persons following obiter dicta comments to this effect by Warren J in the Bonas case. It also based its decision on the point that as the Trustees had a duty to monitor the financial position of the Scheme and preserve its assets they had a direct and personal interest in the outcome and were, therefore, “directly affected” persons.

Second Question: “Can the Trustees refer a determination not to impose an FSD to the Upper Tribunal?”

It was accepted that TPR cannot refer a negative DP determination to the Upper Tribunal following the decision of Warren J in the Bonas case. The issue was whether the Trustees could do so. This turned on the interpretation of s96(3) PA 2004 and whether it should be read in conjunction with s43(9) PA 2004, which referred to a “determination to exercise” the power. It was argued that, as a matter of construction, these referred only to a right to appeal against a positive determination so there was no power to appeal a determination not to issue an FSD against the Targets. The Upper Tribunal concluded that the exercise of the power by the DP under s43 PA 2004 resulted in the issue of a single FSD that contained positive and negative elements and the Trustees were entitled to appeal against both elements of it.

Third Question: “Expiry Time Limits”

The 38 Targets argued that the two-year time limit under s43(9) PA 2004 (as it then was) under which the DP had to issue an FSD against them expired on 14 September 2010 so it was not possible for the Upper Tribunal to issue an FSD against them at this stage. They argued that once TPR’s power to issue an FSD or a Contribution Notice (CN) has expired, the Upper Tribunal cannot resurrect that power and the Upper Tribunal’s directions do not operate retrospectively so as to relate back to the date of the DP’s determination.

The Upper Tribunal decided that, while the two-year time limit might be said to be a limitation period by reference to which the FSD process had to be finished, this was only with regard to TPR’s administrative processes. Furthermore, time ceased to run when the DP issued its determination notice. As the DP had issued a single FSD the fact it did not include all the Targets in the FSD did not prevent the Upper Tribunal considering a reference that they should have been included in that FSD. Thus, there had been a determination to issue an FSD within the two-year time limit and this enabled the Upper Tribunal to consider all matters within the scope of the original warning notice.

Comment

The “directly affected” persons issue raises an important point of law. Should trustees be entitled to participate in DP proceedings and if they do not like the outcome, should they be entitled to appeal to the Upper Tribunal? CN and FSD proceedings can be conducted from start to finish by TPR without the trustees. All they do is duplicate TPR’s case and add unnecessary costs as TPR’s puppets. There is a case that the reference to “directly affected” persons in s96 PA 2004 is only to the targets against whom a warning notice for a CN or an FSD is issued. They are “directly affected” as it may lead to the imposition of a CN or an FSD on them. Trustees could be said to be only “indirectly affected” in that they stand to benefit from the outcome but will never be subject to any orders or directions in the CN or FSD proceedings. Trustees are not needed to represent the relevant scheme or its members as under s5 PA 2004 one of TPR’s objectives is to protect benefits under pension schemes and is doing this in pursuing a case for a CN or an FSD. On this view, trustees have no right of appeal to the Upper Tribunal as only a “directly affected” person can appeal. There is nothing wrong with this as the trustees can (and probably do) assist TPR in preparing the warning notice and can be involved in the process in that way. It was accepted in the Bonas case that TPR cannot appeal against a DP determination so it is odd that trustees can do so. Therefore, trustees can, as TPR’s puppet, open up the way for TPR to indirectly make an appeal it could not make directly itself.

The decision on the time limit point is questionable. The explanation of the two-year time limit in s43(9) as an administrative time limit for TPR seems absurd. FSDs involve the imposition of a financial liability on targets without fault so it is strange that the time limit was construed as being almost irrelevant. It is clear there is a six-year time limit on CN proceedings (which are fault based) but odd that the Upper Tribunal should seek to say that, effectively, there is no two -year limit in FSD proceedings (as was the case prior to the PA 2011). As an alternative to this questionable conclusion, the Upper Tribunal added that once the DP issued a determination, the two-year time limit stopped running, so anything in the determination could be referred to it. This leads to a number of issues. If the DP issues a determination that does not impose an FSD on any target is there a right of appeal? Why should the position differ if it imposes an FSD on some but not all targets?

If the Trustees are not “directly affected” persons for the purposes of s43(9), then the issues on the time limit fall away because they would not have a right of appeal at all. This may be the solution to the case and therefore it may need to be tested by an appeal to the Court of Appeal.