In the recent case of Re Storm Funding Ltd, the High Court held that where contribution notices (CN) are issued to a number of companies following the failure to comply with a financial support direction:
- The contribution notices may in aggregate require payment of more than the actual employer debt in the scheme - a single contribution notice cannot be for more than that amount; and
- It follows that, under these multiple contribution notices, there scheme may recover more than the actual employer debt involved.
FSDs may be issued in respect of occupational pension schemes where the Pensions Regulator determines that the sponsoring employer of the scheme is a service company or insufficiently resourced. FSDs, which can be issued to one or more persons, including the employer and any person with connections to or associated with the employer, require the recipient to provide “financial support”, to remain in place until the scheme is wound up. Approved financial support may consist of, for example, an arrangement under which all members of an employer’s group are jointly and severally liable for all or part of the employer’s pension liabilities, being sums payable under a schedule of contributions and any debt which is or may become due to the scheme. Failure to comply with an FSD can result in the Regulator issuing a CN to any of the targets, requiring payment into the scheme of the whole or a specified amount of the scheme shortfall. Where a section 75 debt is due at the time of the non-compliance with the FSD, the value of the shortfall is the Regulator’s estimate of the debt at that time.
In September 2008, the sponsoring employer of the Lehman Brothers Pension Scheme went into administration which triggered a Section 75 debt of £119million, although more recent assessments of the buyout deficit were in the region of £214million to £275million. In September 2010 the Pensions Regulator Determinations Board issued an FSD against 6 Lehman group entities, requiring them to put in place “financial support” for the pension scheme.
Administrators of 14 Lehman group companies applied to the High Court for directions on the construction of sections 48(1) and 49 of the Pensions Act 2004. The issue for the Court was whether when two or more CNs are issued in respect of the same non-compliance with an FSD, the aggregate amount which can be specified in, or recovered under, the CNs are limited to the shortfall sum, in this case £119 million, or whether it could exceed the shortfall. This case is part in on-going litigation concerning liability under FSDs.
The High Court rejected the administrators arguments that the aggregate should be limited to the shortfall, holding instead that the legislation allowed CNs to be issued to more than one target specifying sums which when taken together would exceed the maximum shortfall, and that the total sum recovered under such CNs could also exceed the maximum shortfall.
The administrators had argued that there was an implicit limit on the aggregate sum which could be specified and recovered under multiple CNs issued in respect of the same non-compliance, on the basis that under a single CN the shortfall was the maximum which could be specified and recovered. The High Court held that there were already sufficient limits in place and that any further implicit limitations would interfere with the Regulators ability to achieve its statutory objectives. It was found that there is no correlation between aggregate sums specified or recovered under CNs and Section 75 debts, therefore there was not requirement for the sums to be limited actual or estimate Section 75 debts. The High Court also confirmed that there was no need to construe FSD provisions in line with the statutory insolvency regime for the purposes of assessing contingent liability.
This case contradicts the commonly held view that schemes could not claim more than the employer’s financial liabilities, but now provides clarification of the limits and impact of CNs and is likely to have broad relevance, given that in many cases more than one target will be named in an FSD. The result is that where there is only one target under an FSD, any CN issued for non-compliance will be limited to the shortfall sum, whereas the recoverable sum could be much greater with multiple targets.