In a judgment of interest to all schemes in which a funding deficit may arise, the High Court has ruled that the Pensions Regulator (TPR) may issue contribution notices (CNs) following non-compliance with a financial support direction (FSD), to more than one target, which in aggregate specify a sum in excess of the maximum shortfall sum defined under the Pensions Act 2004. The aggregate sum recovered may also exceed the shortfall sum.
In September 2010, TPR’s determinations panel issued an FSD against six Lehman group entities requiring them to put in place financial support for the Lehman Brothers Pension Scheme. The scheme's sponsoring employer had entered administration in September 2008 triggering a section 75 debt calculated at £119 million. Recent estimates of the scheme's buyout deficit range from £214 million to £275 million.
The administrators of 14 Lehman group companies applied to the High Court for directions, and the court was asked to consider whether, in circumstances where two or more CNs are issued in respect of the same non-compliance, the aggregate amount that may be specified in, or recovered under them, is limited to the shortfall sum (in this case, £119 million).
Both the trustees and TPR argued that any limit derived from the requirement that TPR must exercise its FSD powers reasonably and that neither the aggregate amounts which may be specified in the CNs, nor the aggregate amount that may be recovered under them, were limited to the shortfall sum.
Richards J rejected the administrators' arguments holding that, on the true construction of the statutory provisions, CNs following non-compliance with an FSD may be issued to more than one target which in aggregate specify a sum in excess of the maximum shortfall sum, and the aggregate sum recovered under such contribution notices may exceed the shortfall sum.
The judgment raises several important issues.
The result of Richards J’s decision is that the level of a scheme’s recovery will depend on the number of targets issued with CNs. Where only one CN is issued for non-compliance with an FSD, the recovery is limited to the shortfall amount, which in this case was the section 75 debt. Where there are several target companies, the CN in respect of each target may specify the whole or part of the shortfall amount.
Where there are fewer target companies, the inevitable effect would be to reduce the level of potential recovery. This may seem a bizarre decision, but the judge noted that on any footing, the full amount of the shortfall debt could be specified in CNs issued to those who have not complied with the FSD, without giving credit for the financial support provided by the others.
The counter argument is that it is perverse to allow TPR to impose funding orders on targets that exceed those a single employer would have to pay at insolvency. As a result, group structures with multiple subsidiary companies could potentially face liabilities greater than the scheme deficit at insolvency.
The decision relates to CNs issued as a result of a failure to comply with an FSD. It is unclear whether it also relates to CNs issued in other circumstances, such as where the material detriment test is met, or where an act or failure to act prevents the recovery of an employer debt. In the absence of any appeal, our view is that the better interpretation is the narrower one. However, as things stand, due to the way the judge in this case construed the legislation, the decision is of concern to group companies of schemes in which a funding deficit may arise.
View the judgment.