The administrators of 20 Lehman and Nortel companies face meeting Financial Support Directions (FSDs) and Contribution Notices (CNs) from The Pensions Regulator as an expense of the administrations because of the judgment handed down by Mr Justice Briggs.

The implications for the rescue culture are severe - unless the hope expressed by Briggs J

"that a higher court may find a way through or around the existing authorities"

is rewarded as the case is appealed.

The scope of the decision should not be underestimated. Any administration of a company that has been, at any time within the previous two years, an associate or connected to an employer with a defined benefit pension scheme shortfall, has a contingent expense, payable in priority to all other creditors (and the administrators' fees) that could amount to the whole shortfall.

Briggs J clearly reached his decision with considerable misgivings, recognising its unfairness and injustice. He observed, in relation to what he described as "a legislative mess" that

"the Insolvency Service or Parliament might wish to consider a suitable amendment, either to the Rules or to the 2004 Act, if persuaded as I have been that the conferring of super-priority as expenses upon the financial liabilities arising from the FSD regime is both potentially unfair to the target's creditors and inconsistent with a decision taken in 2004 not generally to elevate employees' pension claims above the claims of those creditors."

Such a judgment hardly clarifies the effect of an FSD on an insolvent "target". In reality, the interests of pension scheme members and the Pension Protection Fund have collided with the rescue culture like a wrecking ball.

The judgment merits reading for its detailed consideration of the interaction of insolvency and pensions law, for its analysis of administration expenses and the Toshoku principle, and for the finding that parliament legislated (probably inadvertently) for the pensions/insolvency interaction to be addressed by a mechanism that is not fit for purpose.

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We looked at The Purple Book, the Pensions Regulator's ("TPR") and the Pension Protection Fund's ("PPF") view of pensions and insolvency risk, in an earlier post. Further analysis reveals a strikingly high risk of insolvency for the sponsors of a number of schemes.

Of the defined benefit schemes examined by TPR and the PPF at 31 March 2006, the 82 schemes (1.4%) whose sponsors are most likely to become insolvent within 12 months have an average insolvency probability of 35.7%.

24 of those companies can be expected to have failed already and 5 more are expected to fail in the next two months.

75 of those 82 schemes are underfunded and they represent 41% of the combined insolvency and underfunding risk identified amongst underfunded schemes. They have an average insolvency probability of 37% and combined risk of £226m (£3m per scheme).

The trustees and the management of sponsors of these schemes risk severe criticism or potential personal liability if they do not take insolvency advice from a suitable professional. Many have, but now may not be too late for the rest to act.

Having a significant pension fund deficit is not necessarily terminal to a company whose business is viable, but the earlier all options are explored the more likely it is that a solution will be found.

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Filing s120 (Pensions Act 2004) notices with the Pension Protection Fund is now commonplace for insolvency practitioners. Where there is a defined benefit scheme, most go on to report scheme failure - or occasionally rescue. But what if there is no liability, perhaps because despite the employer's insolvency the scheme was exceedingly well funded (unlikely), or perhaps there was a compromise agreement for which The Pensions Regulator gave clearance?

There is something of a gap in the law, which appears to have been drafted on the assumption that all schemes have net liabilities. The problem is in regulation 9 of The Pension Protection Fund (Entry Rules) Regulation 2005.

In the examples given above where there is no liability, the company has not been rescued as a going concern and no other person has assumed responsibility for the employer liabilities, so on the face of regulation 9(1)(a) the IP has no duty to issue a rescue notice. On the other hand, because no-one has assumed or will assume responsibility for the employer liabilities, regulation 9(2)(a) suggests a duty to issue a failure notice.

Common sense says that to push a scheme with a net surplus into a PPF assessment period by submitting a failure notice must be wrong, given the restrictions that will be applied to scheme members' benefits during the assessment period. And is anyone going to challenge the IP who takes this view?

Probably not, especially as I gather the PPF doesn't see that sort of challenge as its role. But why should the IP be left having to interpret legislation liberally to overcome its deficiencies?

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