In a ruling with critical implications for pension funds and insolvency practitioners, the Supreme Court has significantly watered down the right of pensioners who are left out of pocket when their employers go into administration to seek financial redress, via regulators, from other companies within the same group.
Two service companies that had operated final salary pension schemes had gone into insolvent administration. The pensions regulator exercised powers under the Pensions Act 2004 to make financial support directions (FSDs) against other companies in the same groups (target companies) requiring them to provide reasonable financial support to the under-funded schemes.
In circumstances where FSDs were not served on target companies before they themselves went into administration, an issue arose as to how administrators should treat the companies’ potential liabilities under the FSD scheme. Both the High Court and the Court of Appeal had ruled that they should be ranked as an expense of the target companies’ administration and thus given priority over non-secured creditors. Those rulings meant that the FSDs, and ultimately pensioners’ entitlements, were likely to be met in full.
However, in a decision which greatly reduced pensioners’ chances of achieving full recovery, the Supreme Court upheld an appeal by administrators, ruling that the FSDs ranked as provable debts of the target companies, not as expenses of administration, and thus took no priority over other unsecured creditors.