Date 22 December 2010
The efforts of The Pensions Regulator (“TPR”) in tackling the problem of pension fund deficits were boosted recently, when in its ruling of 10 December 2010, the High Court held that a Financial Support Direction (“FSD”) issued by The TPR to an insolvent company, must be complied with by an administrator.
Under the Pensions Act 2004, the TPR has the power to issue a FSD requiring a company to make a contribution to its pension scheme where that scheme is insufficiently resourced for the purposes of paying the pensions accrued by the scheme participants.
The need for compliance with a FSD by a solvent company is not in doubt. The issue in the recently reported ‘instant’ case however, were the submissions by the administrators of 20 companies (led by those appointed in respect of Nortel Networks and Lehman Brothers Europe Division) that:
(i), a company cannot be made to comply with an FSD, if issued after it has gone into insolvenc; and
(ii), if any payment should be made by that company into its pension scheme, such payment should only be made out of any surplus following payment to secured creditors.
The High Court rejected both the administrators’ submissions, in so doing, ruling that where an FSD is issued to an insolvent company, the administrator’s costs in dealing with the same are to be treated as an expense of the administration and be paid in priority to secured creditors.
The High Court’s ruling has the potential to cause significant uncertainty for insolvency practitioners. If the TPR has issued a FSD during a company’s insolvency, there is the risk that an administrator could have insufficient funds to comply with the same if it has gone on to make distributions to secured creditors. By that, an administer risks being liable to a claim for misfeasance for which they should seek legal advice.
For the future, on appointment as administrator, IPs should liaise with trustees of any pension scheme run by the insolvent company (and so far as possible, with the TPR), to assess the possibility of a FSD being issued and make provision for it.
To discuss insolvency in more detail, please contact Ben Ashworth on 01727 798058 or email ben.ashworth@salaw.com.
For more information about pensions click here to be directed to the Employment Department.