Rechtsanwalt, Legal Director
Out-Law News | 02 Aug 2013 | 9:28 am | 2 min. read
The judgment in favour of the trustee of a pension scheme connected to the UK subsidiary of failed Icelandic bank Kaupthing will give certainty to members of underfunded pension schemes affected by insolvency events, according to pensions law expert Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com.
Administrators of Kaupthing, Singer & Friedlander, which was put into administration in 2008, had sought to have £2 million in pension scheme funds transferred to the Bank of England ahead of the insolvency put towards the deficit still owed by the employer to the scheme. The money had been recovered by BESTrustees, the independent trustee of the pension scheme, following the 2008 financial crisis but before the bank's insolvency.
The ruling follows a decision by the High Court last year that the value of a pension scheme debt triggered by an insolvency event should be calculated as of the date that the employer became insolvent and not the date on which the debt was certified.
Section 75 of the 1995 Pensions Act creates a debt owed to the trustees of an occupational pension scheme by its sponsoring employer when certain 'trigger' events occur, which can include corporate restructuring as well as insolvency. This debt is calculated by setting off the 'buy out' valuation of the scheme's liabilities against the value of the assets currently held by that scheme. The buy out valuation is the equivalent of the cost of going into the market to purchase annuities, or insurance policies that would match those liabilities, from insurers.
Meeks, who was part of the team that acted for BESTrustees in the court proceedings, said that taken together, the two judgments would "allow trustees to proceed with confidence as to what the court expects when calculating employer debts".
"One of the benefits of the employer debt regime governing the treatment of pension schemes in insolvency proceedings is that it gives maximum clarity at the earliest possible point," he said. "By 'freezing' the calculations of assets and liabilities at the point at which the insolvency event occurs, the calculation of the debt does not need to be endlessly revisited in the light of changing circumstances."
"The judge has firmly endorsed the importance of the actuarial certificate in determining the size of the debt owed to the scheme by the sponsoring employer under statute. It would have been bizarre if trustees were expected to assess the liabilities exclusively on the form of the regulations but to look behind the form of the regulations and conduct a further investigation when calculating the scheme assets," he said.
The administrators did not appeal against the High Court's decision on the point at which the section 75 debt should be calculated. However, they argued that this amount should be reduced by the amount held in trust to prevent the recovery of what was in substance the same claim twice. The claim to the £2m from the trust account, which had been duly paid, was essentially the same as the claim to the same amount as part of the section 75 debt, they said.
However the Chancellor of the High Court, Sir Terence Etherton, said that the administrators' arguments "plainly" failed, as the ring-fenced money was "always held beneficially for the Trustee" rather than amounting to part of the section 75 debt.
"The Employer Debt regulations require assets and liabilities of a pension scheme to be valued, for the purposes of ascertaining a section 75 debt, in a notional exercise immediately before the trigger event," he said.
"Changes in the value of assets or the extent of liabilities after that time are irrelevant ... The statutory debt is, as [the trustee] submitted, a single indivisible debt. To go behind the actuary's certification ... would also be unprincipled for all the reasons I have given earlier," he said.
Bruce McNess of BESTrustees said that the decision was "a victory for common sense as well as the members of the pension scheme".
"Their interests were at the heart of this case and they will benefit directly from this decision," he said.
Rechtsanwalt, Legal Director