Regulator nets £184m from Lehmans as cases treble

The investigation is in many ways unique due to the circumstances in which Lehmans became insolvent, but some argue it has wider significance for schemes with overseas parent companies.

The settlement is the result of a six-year investigation which began in late 2008. The regulator’s determinations panel issued financial support directions for six of the 38 companies in the Lehman Brothers Group in September 2010.

The regulator’s interim chief executive Stephen Soper said in a statement: “This is a pleasing and appropriate settlement for the 2,466 members in the Lehman Brothers pension scheme, and shows we will not hesitate to pursue regulatory action to protect members’ benefits and PPF [Pension Protection Fund] levy-payers where we believe it is appropriate.”

The regulator has the power to issue FSDs and contribution notices against defined benefit scheme sponsors and their associates if they deem that corporate activity might have a negative impact on the scheme’s security.

In the past year the number of avoidance investigations being carried out by the regulator jumped to 55 from 17 the previous year, according to the successive annual reports.

“The regulator has increasingly been required to engage its anti-avoidance powers to secure the retirement benefits of members and protect the PPF,” said Soper. “This case demonstrates that the regulator’s anti-avoidance powers can be used effectively, even in highly complex international insolvency situations.”

When the determinations panel rules to issue an FSD or CN, all parties are notified and given the opportunity to refer the decision to the Upper Tribunal. If the decision is referred, the CN or FSD cannot be issued until the case before the tribunal is finished.

The panel has determined CNs should be issued and sent determination notices on two occasions (for FSDs, see graphic).

Simon Kew, director of pensions at Jackal Advisory, said the size of the settlement combined with the length of the investigation was an indicator of the regulator’s willingness and capability to use its powers.

He said that in the past, the regulator may have been seen as a “paper tiger”, but the determination “shows they’re not limited in their legal resources”.

We will not hesitate to pursue regulatory action to protect members’ benefits and PPF levy-payers where we believe it is appropriate

Stephen Soper, Pensions Regulator

He added: “It’s the largest recovery that the regulator has made. It’s also been lingering on for six years on the case so not quick.”

Chris Parlour, senior consultant at Punter Southall, said the settlement would mark the end of the Storm Funding appeal, a case centred around whether the regulator could issue notices or FSDs for more than the total amount of the shortfall of the scheme.

“The effect was that the regulator could ask several of the Lehmans companies for funds that exceeded the total section 75 debt that was calculated at the time of the insolvency.”

The section 75 debt, also known as employer debt, is the employer’s share of contributions to cover any underfunding in a scheme when the employer leaves.

Offshore sponsor risk

At the time of Lehmans Brothers’ insolvency in 2008 the scheme’s deficit was calculated at £119m, however this increased over time and was estimated in June 2014 to be £184m.

Kew said the determination raised considerations for schemes with sponsoring employers that were part of a larger group based outside the UK.

“If you have a larger group and the power or money is offshore it’s really important to understand where the money is coming from,” he said.

Kew said where schemes were part of complex organisational structures, trustees should be mindful of the securities in place, whether through assets or their covenant.

He added: “If trustees’ sponsoring employer is a holding or shell company they could be in a very vulnerable position.”