Legal experts have said a High Court ruling allowing schemes to sell section 75 debts owed to them could reduce their running costs by speeding up the exit of sponsoring employers.
The ruling last month on the final salary pension scheme of Kaupthing, Singer & Friedlander, the UK subsidiary of defunct Icelandic bank Kaupthing, laid down a significant precedent by granting trustees permission to sell to a third party the estimated £74m debt owed by the employer.
Pensions lawyers said the ruling paved the way for the development of a useful secondary debt market, but urged trustees to consider the impact on members of winding up schemes.
Prior to the ruling, many schemes may have wanted to reassign their section 75 debt but did not have the capital to go to court and risk the eventual outcome.
It is now clear that section 75 debts are assignable. This opens the door for a change in approach by pension trustees
Isabel Nurse-Marsh
A debt compromise allows trustees to accept a payment from the employer for less than the outstanding amount, while a debt reassignment allows trustees to sell their debt to a third party.
In the Bradstock case of 2002, the High Court ruled it was permissible for trustees to compromise a debt owed by an employer to a pension scheme, but did not extend this to debt reassignment.
Isabel Nurse-Marsh, partner and pensions litigation expert at law firm Pinsent Masons, said: “It is now clear that section 75 debts are assignable. This opens the door for a change in approach by pension trustees.”
By selling their debt to a third party, schemes could wind up the administration process of insolvent employers much more quickly, thereby avoiding associated ongoing costs.
Schemes would also be able to secure a known value for the debt and lock in a position for members, rather than waiting for dividends from the employer.
Judgment call
Richard Knight, partner at law firm Burges Salmon, said it was crucial for trustees to demonstrate due diligence at the time of selling the debt in order to avoid challenges by members further down the line.
“What you don’t want is a member challenging that if you’d waited for the administration to complete, the dividend could have been much higher,” he said.
Knight said trustees should seek guidance on the value of the debt to be sold and on the development of the secondary debt market likely to emerge from this ruling.
Nurse-Marsh also warned trustees of the potential for conflicts of interest to arise between themselves and potential buyers of scheme debts.
“The interest of investment funds who seek to purchase the debts may also change the dynamic of any negotiations between stakeholders in restructuring scenarios,” she said.
Investment funds are driven to make a target rate of return, while trustees aim to achieve the best possible outcome for scheme members.
Kate Richards, partner at law firm Nabarro, said trustees must stand by their fiduciary duty in the event of the development of a secondary debt market.
Richards said “the right circumstances, scope and solvency level” would be required for a scheme to sell on their debt.
