High Court ruling will create new market for pensions debts, says expert

Out-Law Analysis | 04 Dec 2014 | 2:02 pm | 1 min. read

FOCUS: A new market for trading the pension debts of insolvent companies will be created as a result of a recent High Court ruling. The ruling will also result in more efficient, earlier winding up of pension schemes when companies go out of business. 

This is good news for pension trustees who will be able to sell debt to companies better able to recover the debt. Meanwhile they will receive a lump sum which will benefit scheme members and provide certainty about future income.

Essentially this ruling allows pension trustees to focus on the needs of their members, not on chasing insolvent companies' debts. The early payment that the sale of a debt will provide will enable them to plan better for the future.

And in allowing schemes to close earlier this practice means that less money is spent on keeping the scheme running and more of it ends up benefitting members.

Kaupthing, Singer and Friedlander (KDF) was the UK subsidiary of the now-defunct Icelandic bank Kaupthing. When it went into administration there was a shortfall in value between the assets and liabilities of its pension scheme. The administrators agreed that it owed the scheme £74 million.

The part of the Pensions Act which says that employers must pay this shortfall is section 75, so it is known as a section 75 debt.

The pension scheme trustees, BESTrustees, wanted to sell that debt to a third party. Under this kind of arrangement a third party would seek repayment of the debt and would give the pension scheme a fixed sum.

The High Court said in its ruling that the debt could be sold. Pinsent Masons, the law firm behind Out-Law.com, acted for BESTrustees in the case.

The advantages for pension scheme trustees are clear: by selling the debt for a fixed sum they get an early resolution and certainty for members. And it creates an opportunity for distressed debt funds who now have access to a new kind of asset.

The interest of investment funds who seek to purchase the debts may also change the dynamic of any negotiations between stakeholders in restructuring scenarios: a fund is usually driven to make a particular target rate of return, whilst a pension trustee aims to achieve the best possible outcome for its scheme members and therefore might be guided by wider considerations including the potential cost savings from winding up the pension scheme early.

Richard Williams is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com