The UK Pensions Regulator (TPR) has secured a settlement in its case against Lehman Brothers over funding the deficit left in its UK defined benefit (DB) scheme after insolvency.
The settlement secures the full insurance buyout of the DB pension fund, which had a buyout basis deficit of £184m (€230m) at the end of June.
The case, ongoing since 2008, began when the US bank filed for Chapter 11 protection, sending its operations across the globe into insolvency.
The bank’s UK DB scheme was left in deficit with the regulator launching legal challenges against subsidiaries to keep the scheme from entering the Pension Protection Fund (PPF).
Stephen Soper, interim chief executive of the regulator, said the settlement showed TPR would not hesitate to protect the PPF and members’ accrued benefits.
“The estimated £184m settlement payment will be the largest sum paid to a scheme as a result of our actions so far,” he said.
“This case demonstrates the regulator’s anti-avoidance powers can be used effectively, even in highly complex international insolvency situations.”
The settlement of the case could set a precedent in UK insolvencies and situations where insolvencies occur outside of the UK but leave a DB scheme without a sponsor.
In 2010, the regulator’s determinations panel ordered six Lehmans subsidiaries to make contributions towards its DB scheme via a Financial Support Direction (FSD).
An FSD was also given to Canadian firm Nortel Networks, which then joined Lehmans to challenge the strength of the directives and TPR’s right to issue orders against insolvent companies.
In December 2010, TPR won its rights against Nortel, and Lehmans’ European arm, and subsequently won again in the Court of Appeal – after both firms again challenged the decision.
TPR was joined by the trustees of Lehmans’s UK DB scheme in challenging the appeals against the FSD.
In July 2013, the Supreme Court further added to TPR’s claim by ruling that issued FSDs ranked as a provable debt in cases of insolvency, placing the claims alongside unsecured creditors.
The case continued until an agreed settlement was reached on 18 August 2014, with the scheme to be wound up outside of the PPF and liabilities transferring to a third-party insurer.
A PPF spokesman welcomed the decision, which avoided the reduction of benefits to scheme members and an additional burden on the lifeboat fund and its levy payers.
“It means a potentially large liability will not be coming into the PPF,” he said.
“This demonstrates the value of the regulator’s powers to protect member benefits and minimise calls on the PPF.”
However, the £2.1bn claim against Nortel Networks regarding its underfunded scheme after the company’s 2009 bankruptcy remains ongoing, with legal challenges taking place in the US.
In a report on the case, TPR said: “The parties to the regulatory action have now agreed the terms of a settled outcome, which results in certain companies in the Lehman Brothers group paying the trustees of the scheme an amount expected to buy out in full the scheme’s liabilities.”
Peter Gamester, chairman of the trustees of the Lehman Brothers Pension Scheme, said the settlement was made possible by the underlying financial strength of the bank’s UK operations after its successful administration.
He thanked the scheme members for their patience during the six-year legal proceedings following the bank’s collapse.
“This patience has been rewarded by the commitment to provide funding to secure pension entitlements in full,” he said.
The joint administrators of Lehman Brothers’ European arm also welcomed the settlement of the case.
Tony Lomas of PwC said: “The conclusion of this significant pension scheme deficit issue is another milestone on the path to resolving the administration.
“It benefits other creditors by securing significant contributions to the cost of the settlement from other Lehman Group companies and alleviates concerns for pension scheme members about the provision of their pension benefits.”