In this August edition of the Pensions E-Bulletin, we look at the Pensions Regulator’s statement on its approach to financial support directions (FSDs) in insolvency situations, the shortened guidance on incentive exercises issued by Pensions Regulator following the publication of the industry code of good practice as well as noting the updated guidance on multi-employer scheme departures and the consultation by the Takeover Panel on proposals relating to pension scheme trustees. 

FSDs and insolvency – the Regulator’s statement

The Pensions Regulator has issued a statement on its power to issue FSDs against companies after an insolvency event has occurred.  It is intended to help the pensions and insolvency industries understand its approach to FSDs in insolvency situations and provide reassurance that the Regulator does not intend to “frustrate” the proper workings of the restructuring and rescue culture or the lending market following the decision in the widely reported Nortel and Lehman cases.


The Pensions Regulator has the power to issue an FSD requiring a connected or associated person to put in place financial support for a scheme in circumstances where the scheme employer is a “service company” or “insufficiently resourced”.  

Last year the Court of Appeal upheld the High Court’s decision in the Nortel and Lehman cases that where a liability is payable under an FSD issued after an administrator has been appointed, it must be treated as an expense of that administration.  This results in the pension liabilities ranking above unsecured creditors, floating charge holders and even ahead of the administrator’s fees (although not secured creditors).  This can be contrasted to the position where an FSD is issued prior to an administration and the scheme continues to rank as an unsecured creditor.

This decision can be seen to frustrate the administration process because administrators may be reluctant to accept appointments that involve defined benefit pension schemes as they may not be able to discharge their fees and expenses.   It also appears that lenders are more reluctant to lend to businesses with defined benefit schemes as the imposition of an FSD could mean that pension scheme liabilities will rank ahead of any floating charge realisations and unsecured debt the lenders may hold.

The Regulator’s statement

The Regulator stresses that it does not intend to frustrate the rescue culture or obstruct administrators in the proper performance of their duties and indicates that it has no intention of deliberately delaying the issue of an FSD until after an insolvency event in order to benefit from an improved priority position.     

The Regulator notes that an FSD does not itself contain an order for any specified amount or form of support and that when considering what financial support is reasonable the Regulator confirms it will:

  • consider what level of financial support would have been reasonable if an FSD had been issued before the insolvency event;
  • have regard to the FSD recipient’s financial circumstances;
  • take into account the interests of directly affected parties, which includes the interests of the company’s creditors as a whole; and
  • have regard to the other creditors’ claims, including the return that the unsecured creditors would receive if the FSD had been issued prior to the insolvency event – which the Regulator expects will result in a level of support which achieves “broad equity” between the scheme and the unsecured creditors.

Taking these factors into account, where an insolvent FSD recipient has submitted proposals for financial support, the Regulator states that it is “highly unlikely” to be reasonable for it to insist upon a level of support which would leave the administrators out of pocket and unsecured creditors without any return.  The Regulator also notes that in “most circumstances” it would not seek to object to subordination of the FSD liabilities behind the administrator’s reasonable remuneration.

The statement also suggests that further comfort and certainty can be obtained through due diligence, early contact with the Regulator and use of the formal clearance procedure.


Whilst the statement provides some welcome guidance to lenders and administrators, it does not provide certainty as there is no guarantee of how the Regulator will act in an individual case.  It is likely that the potential for ‘super-priority’ of pension liabilities will continue to be taken into account by lenders and administrators unless and until there is a change in the law.    

Pensions Regulator’s guidance on incentive exercises

Further to the release of the new industry code of good practice relating to incentive exercises (as highlighted in our June edition of the Pensions E-Bulletin), the Pensions Regulator has replaced its guidance for trustees and employers on this issue.  The new short-form statement endorses the new code of practice and reiterates the existing five key principles by which an incentive exercise will be judged.  The Regulator also confirms its view that trustees should start from the presumption that incentive exercises are not in most members’ interests and warns that it may intervene where an incentive exercise gives it cause for concern, for example by coercing or placing undue pressure on members to transfer or give up their benefits.

The Pensions Regulator updates multi-employer scheme departure guidance

The Regulator has updated its guidance for trustees and employers of multi-employer schemes about managing the departure of employers from schemes.  New material in the guidance covers the introduction of flexible apportionment arrangements on 27 January 2012 (as discussed in our Pensions E-Bulletin in January) as well as the provisions permitting an employer to extend the ‘period of grace’ before an employer debt is triggered.

Takeover panel: pension scheme trustee proposals

The Takeover Panel is consulting on proposals to extend provisions of the Takeover Code which currently relate to employee representatives to the trustees of the target's pension scheme.  It is proposed that the Code would be amended to, amongst other things, require disclosure by the bidder of its intentions in relation to the target’s pension scheme and the likely impact of its plans, and give the trustees a right to state their views on the effect of the offer.  The bidder and target’s board would also be bound for 12 months by any statements they make regarding any action they intend to take or not to take in relation to the pension scheme.