On 24 July 2013, in BESTrustees v Kaupthing, Singer & Friedlander [2013] EWHC 2407 (Ch) the High Court ruled in favour of an underfunded scheme, whose insolvent sponsor hoped to offset £2m in payments against its outstanding debt.

The sponsoring employer of a DB scheme went into administration and triggered a statutory debt under section 75 of the Pensions Act 1995. Following litigation holding that the actuarial factors should be those applicable at the insolvency date (and not those applicable at the later certificate date), the section 75 certificate was issued by the actuary. This showed a deficit based on the scheme’s net assets (as shown in its audited accounts) less its benefit liabilities (as calculated by the actuary based on buy-out costs).

The scheme’s accounts had been drawn up by the trustees and audited by the scheme’s auditors within a few months of the insolvency date. One of the scheme’s assets was a deposit of £2m with the employer (a bank). This was shown at a nil value in the accounts because (apparently) of uncertainty about the amount of recovery (so the s75 amount was £2m higher than it would have been had it been shown at the full amount). In fact, the full £2m was later paid by the employer (the £2m had been held by it on a statutory trust), but the trustee had not reflected this in the accounts and so it was not reflected in the section 75 certificate.

The administrators decided to reduce the trustee’s proof of debt by £2m, on account of £2m having been paid to the trustee from a trust account set up by the scheme’s employer. The trustee made an application to reverse this decision.

The court granted the application, ruling that it would be ‘unprincipled’ to go behind the actuary’s section 75 certificate, which establishes the level of statutory debt as a ‘single indivisible debt’. It held that the ‘employer debt regulations require assets and liabilities of a pension scheme to be valued… in a notional exercise immediately before the trigger event (here the insolvency).’

This provides more certainty to trustees that changes in the value of assets and liabilities after the point of insolvency are irrelevant to the calculation of section 75 debt. However, it does leave trustees, actuaries and auditors more exposed to claims that they need to exercise due care in getting the section 75 certificate right (eg in getting the accounts right). This case did not include any claims on this potential due care liability.