UK Pensions Regulator issues FSD against Nortel for £2.1bn deficit
UK - The UK Pensions Regulator (TPR) has confirmed it has issued a Financial Support Direction (FSD) against 25 companies in the Nortel Group in Canada, the US, the UK and Europe, requiring them to provide support to the UK pension scheme to cover a £2.1bn (€2.5bn) deficit.
Nortel Networks UK (NNUK), the UK sponsor of the scheme, went into administration in January 2009, with several other Nortel entities around the world entering bankruptcy proceedings, including in the US and Canada.
However, while the pension shortfall relates to a UK scheme, TPR’s Determination Panel found that it would be “reasonable to impose the requirements of an FSD on the target companies” included in the FSD.
This is based on the fact that, from 1991, the Nortel Group operated increasingly as a single entity, and the distinction between corporate legal entities was largely ignored.
In addition, Nortel group companies derived benefit from NNUK’s research and development and sales and marketing activities, for which NNUK was not adequately compensated.
The Determination Panel said: “For some 12 years prior to 2002, the Nortel group benefited by paying little or no contributions to the scheme.
“The group also benefited from the controlling parent companies’ failure to adequately address the deficit from 2002 onward.”
It has therefore issued the FSD, which under UK pension law requires the 25 target companies to provide financial support of as much as £2.1bn - the shortfall on the section 75 buyout basis.
However, a warning notice issued by TPR to the Canadian and US insolvency proceedings earlier this year triggered complaints that the regulator had broken the “stay” on creditor claims.
This led to the Ontario Superior Court declaring the UK FSD process breaches the legal stay and ordered that any outcome of it would be null and void in the Canadian insolvency process. (See earlier IPE articles: TPR appeals Nortel ruling over FSD ‘misinterpretation’ and TPR pursues Nortel in Canada for £2.1bn pension fund bill)
TPR subsequently lost an appeal against the ruling, while in the US it is still appealing a similar judgement in the US Bankruptcy Court of the District of Delaware, which made an order against the trustees and PPF declaring their participation in the regulator’s proceedings would breach the Chapter 11 stay.
But June Mulroy, executive director for delivery at TPR, said: “The panel’s decision is obviously welcome.
“It makes clear that companies within the Nortel group benefited from both the activities of Nortel Networks UK - and from the failure by the controlling Canadian companies to allow the UK company to repair the sizeable pension deficit.”
She added that the FSD enabled the scheme to have a voice in the insolvency proceedings of the target companies.
“The FSD is a UK regulatory process and is not an attempt to enforce outside of the Canadian or US insolvency processes,” she said.
“It provides certainty over the size of the pension debt for the courts and those supervising the Nortel insolvencies.
“We will continue to strive for the best result for the 42,000 members of the Nortel Networks UK Pension Plan and limit calls on the Pension Protection Fund.”
Jonathan Land, business recovery services partner at PricewaterhouseCoopers, who advised Nortel’s pension fund trustees throughout the two-year case, said: “TPR has made the right decision under the circumstances, particularly given the size of Nortel’s pension deficit.
“Following hot on the heels of its first contributions notice to Belgium-based Michel Van De Wiele, the regulator has sent a powerful sign that it is not afraid to pursue companies globally to protect the interests of UK pension scheme members.
“This is a clear message to international groups that they need to support UK pension schemes.”