UK – Trustees for the underfunded UK pension scheme of Lehman Brothers have welcomed a Supreme Court ruling that claims from unsecured creditors are of equal importance to demands to fund pension deficits.
Overturning a previous verdict from the Court of Appeals in a case brought jointly by the administrators for Lehman Brothers and Canada's Nortel Networks, the UK's highest court ruled that financial support directions (FSDs) – issued by the Pensions Regulator (TPR) to force a company to address scheme underfunding – should not be regarded as an expense of the administration, but rather as a provable debt.
Stephen Soper, the regulator's executive director for defined benefit funding, welcomed the ruling, noting that a verdict that would have ranked an FSD below unsecured creditors would have had "serious consequences" for TPR's ability to protect members.
Chairman of trustees for Lehman's pension fund Peter Gamester said they were "delighted" by the ruling, made nearly five years after the bank collapsed, as the court's belief that FSDs ranked alongside other unsecured creditors was in line with its position since the dispute began.
"It is an important step forward in the trustees' efforts to obtain financial support for the pension scheme from group companies to help pay pensions for scheme members," he added.
Linklaters' global head of restructuring and insolvency Tony Bugg, whose firm advised the Lehman Brothers administrators, said the ruling was "a victory for common sense".
Nick Moser of Taylor Wessing, meanwhile, noted that the Supreme Court had now clarified that funds did not enjoy a "super-priority" upon a sponsor's insolvency.
Bugg added: "The concern before today's decision was that the Pensions Regulator had the power to boost the ranking of its claim simply by waiting for a target company to enter administration.
"The Supreme Court unanimously agreed that Parliament cannot have intended such an unfair and arbitrary result."
Moser, head of his firm's restructuring and corporate recovery group, also noted that the judgment would ensure companies continued to have access to affordable finance.
Mayer Brown pensions partner Andrew Block further highlighted the ruling's "upside" for trustees, despite FSDs now ranking lower following the Court of Appeal verdict.
"An inability on the part of employers to secure financing could have prejudiced the employers' ability to fund their pension schemes in the long term," he said.
"Not only would this outcome not be in the interests of trustees and scheme members, it would also defeat the regulator's objectives of protecting accrued benefits and reducing calls on the [Pension Protection Fund]."
TPR's Soper said the regulator had not had any intention of "frustrating the proper workings of the administrative process".
"Today's judgment will provide clarity to the UK's restructuring and rescue practitioners that FSD liabilities have to be recognised in insolvent situations but do not have priority over administration expenses or secured debts."
However, the Pension Protection Fund's (PPF) Malcolm Weir, head of restructuring and insolvency, noted that the lifeboat fund would now have to "assess the implications" for both affected schemes.
He added that it would also need to consider the impact the ruling would have on any future recoveries where the PPF acted as an unsecured creditor.
At the time of insolvency, Lehman's defined benefit (DB) fund reported a deficit of £148m (€172m), dwarfed by the £2.1bn the Nortel Networks UK Pension Scheme said it required to achieve a buyout.