The Pensions Regulator has announced, following several years of proceedings and court skirmishes, that a compromise has been reached in relation to the Financial Support Directions (FSDs) issued under the Lehman Brothers UK pension scheme.

FSDs and the Lehmans case – a reminder

If a company responsible for funding a pension deficit is either a “service company” or “insufficiently resourced”, as defined in the legislation, the Regulator can, if it believes it to be reasonable, issue an FSD (effectively a guarantee of any amount up to the “section 75” buy-out deficit in a scheme).

Lehman Brothers Holdings Inc filed for US bankruptcy in 2008, triggering insolvency for the majority of the worldwide group. The sponsoring employer under the UK pension scheme was a service company and the insolvency of the main UK Lehman Brothers entities left its trustees without any obvious means of providing ongoing support for the scheme. In 2010, the Determinations Panel of the Regulator determined that FSDs should be issued to six companies within the Lehman Brothers group, including the main operating companies in the UK and the US parent.

Since then the Regulator has had to navigate a number of further legal hearings and challenges, including the decision of the Supreme Court last year that confirmed that FSDs were effective against target companies in insolvency. 

The settlement and its implications

The Regulator says that companies within the Lehman Brothers group have now agreed to meet the expected cost of paying member benefits in full. With almost 2,500 scheme members, the estimated buy-out figure as at 30 June 2014 was £184 million. The compromise will keep the scheme out of the Pension Protection Fund.

The Regulator will be buoyed by the outcome, and may feel that it answers criticism that its moral hazard powers lack teeth. It says that, where appropriate, it “will not hesitate to pursue regulatory action” to protect members’ benefits and PPF levy payers, and that the case shows its powers can have a positive effect “even in highly complex international insolvency situations.”

The Regulator will also be pleased that an appeal in the recent Storm Funding case, in which the High Court ruled that the Regulator was not limited to the section 75 debt originally struck when requiring multiple targets of regulatory action to provide financial support, will now be discontinued.

It will be interesting to observe what effect, if any, the settlement has on the other outstanding FSD cases currently ensconced in the court system.

The Regulator’s report can be found here.