UK: Lehman Brothers Pension Scheme - The Treatment Of Pensions Claims In A UK Insolvency Process

Last Updated: 4 February 2015
Article by Stephen Phillips, Jack Mead and Scott Morrison


When the Lehman Brothers group imploded in September 2008, the impact of events on the Lehman Brothers UK pension scheme (the "Scheme") was not seen as a key concern for anyone other than the members themselves. Yet as time progressed, the Scheme featured heavily in resolving the administration of many UK Lehman Brothers group entities and in the process important legal principles relating to defined benefit pension schemes were decided. Many ancillary points were decided during the litigation (some of which are discussed below), but the most important issue, that of the priority of debts on a winding-up, is of great significance.

Defined benefit schemes are a type of occupational pension scheme set up by employers for the benefit of their employees. There are generally two types of occupational pension scheme:

a) defined benefit schemes (where a defined level of benefit, usually calculated by reference to a member's final salary, is promised on retirement); and

b) defined contribution schemes (where benefits payable on retirement are calculated by reference to contributions paid and returns on investment).

This article focuses on the operation of anti-avoidance pension legislation in relation to UK defined benefit pension schemes. In particular we discuss the litigation over the imposition of pension liabilities on certain Lehman group companies and attempts of those companies to clarify the nature and extent of their obligations.

The outcome of the Supreme Court hearing on the priority issue overruled previous judgments which would have transformed the prospects of recovery for many unsecured creditors by giving pension liabilities "super-priority". The facts of the matter also reinforce the principle that, thanks to anti-avoidance legislation, pension liabilities are quite transferable within corporate groups at the behest of the UK Pensions Regulator (the "Regulator"); something which should be borne in mind by unsecured creditors, even when the company they are lending to does not have a pension scheme.

Factual and Regulatory Background

In the UK, when an employer with an occupational pension scheme suffers an insolvency event, a debt becomes due from the employer to the trustees of its pension scheme which is equal to the shortfall (if any) in the assets of the scheme to its liabilities. Named after the relevant section in the Pensions Act 1995, this debt is known as "section 75 debt".

If the employer does not have sufficient assets to cover its section 75 debt, a pension protection fund exists to protect employees who are members of defined benefit pension schemes. The fund is financed by levies upon all benefiting pension schemes. However, in order to guard against an employer transferring the burden of funding its pension scheme to the fund (for example by structuring its activities using a "service company"1), an anti-avoidance regime was created, known as the Financial Support Direction ("FSD") scheme.

If certain circumstances are met, the Regulator can issue an FSD to entities connected or associated with an employer. The recipient of an FSD, is, as the name suggests, required by law to financially support the relevant pension scheme. An FSD does not stipulate how much each recipient must contribute; it merely requires that a "financial support arrangement" is established to the satisfaction of the Regulator. If a recipient does not comply with the terms of an FSD, the Regulator may issue a Contribution Notice ("CN"), therein creating a specific monetary liability payable by the company to the scheme trustees. A CN will be calculated to make up the deficit in the relevant pension scheme, an amount based on the amount of section 75 debt.

Regulator Investigation

The main sponsoring employer for the Scheme was Lehman Brothers Limited ("LBL"). LBL provided substantially all of the staff and infrastructure for the Lehman group's operations in the UK - making it a service company under the Act - until on 15 September 2008 it entered into administration with the Scheme in deficit and with no ongoing support from other group companies.
Shortly afterwards, the Regulator commenced an investigation into the Scheme which at that time was underfunded and without a solvent supporting entity. It subsequently issued certain group entities (which include Lehman Brothers Holdings Inc and Lehman Brothers International (Europe)) with FSDs (the "Targets").

Ancillary Issues

The Regulator's decision to issue FSDs to the Targets was referred to the Upper Tribunal (Tax and Chancery) by the six FSD recipients, who argued that no such obligation should be placed upon them, and also by the Scheme trustees, who wanted FSDs to be issued to up to 38 other Lehman group entities. These proceedings were stayed to allow for additional legal contests to the resolved.

On its slow journey to the Supreme Court, various judges and panels considered many different aspects of pensions and insolvency law, and the following rulings were made:

a) FSDs can be issued against insolvent companies;

b) FSD obligations can exceed, in aggregate, the section 75 debt owed to a pension scheme;

c) Pension scheme trustees are "directly affected persons" for the purposes of the Pensions Act 2004, giving them the right to make appeals about the decisions of the Regulator2; and

d) the two year time limit for the Regulator to issue an FSD does not apply to directions which the Upper Tribunal may give regarding an FSD, or any subsequent order or appeal made on those directions.

Although noteworthy, the above decisions mostly affect legal procedure and will be of limited interest to professionals working outside of those areas. In contrast, professionals in many different areas, especially those involved in structuring deals in corporate groups with defined benefit pension schemes, need to be aware of the main ruling of the Supreme Court in the Lehman pension litigation because it cuts to the heart of the English restructuring and insolvency system: the statutory ranking of debts on a winding up.

Supreme Court – "Super-Priority" and FSDs

After deciding to whom FSD / CN liabilities ("Support Liabilities") should apply, and given that most of the Targets had gone into insolvent administration, the next issue for the courts to decide naturally related to where Support Liabilities rank in the priority of liabilities set out in UK insolvency law when the FSD / CN is issued after the target has entered administration3.

UK insolvency law4 dictates that when a company is liquidated, the order of priority for payment out of the company's assets is as follows:

  1. Fixed charge creditors;
  2. Expenses of the insolvency / administration;
  3. Preferential creditors and Prescribed Part5;
  4. Floating charge creditors;
  5. Unsecured provable debts;
  6. Statutory interest;
  7. Non-provable liabilities; and
  8. Shareholders.

The lower courts both held that Support Liabilities constituted expenses of an administration (position number 2 in the above list), thereby giving them a status known as "super-priority", ranking above not only unsecured creditors and floating charge holders but also preferential creditors. It was reasoned (somewhat reluctantly as the courts considered themselves bound by precedent) that Support Liabilities could not be provable debts, as most practitioners had assumed they were, because they were not legal obligations existing at the commencement of an insolvency event. Although on one analysis, Support Liabilities could be seen as contingent liabilities formed before an insolvency event, the courts rejected this because such liabilities depend entirely on the discretionary powers of the Regulator to issue an FSD. Significantly, under UK insolvency law, the administrators' remuneration ranks after the expenses of the administration6.

On appeal, the Supreme Court considered the following three options as to how Support Liabilities should be treated:

a) expenses of the administration;

b) provable unsecured debts (ranking equally with other unsecured liabilities of targets); or

c) Neither provable debts nor expenses (ranking behind even the unsecured liabilities of targets).

The Supreme Court held that Support Liabilities were provable unsecured debts, overruling the lower courts by a unanimous decision. Free from the restrictions of contrary precedent, the Supreme Court made its decision seemingly based largely on what was reasonable; the lower court's ruling had created a number of anomalies, not least the fact that Support Liabilities would now rank higher than the original section 75 debt that they were designed to guarantee.

Following a detailed examination of the Insolvency Rules 1986, Lord Neuberger, who gave the leading judgment, argued that even when issued after an insolvency event, Support Liabilities could be deemed to have been incurred before that event (and so constitute provable debts) because the relevant company will have taken a number of steps prior to insolvency which (a) "put it under some legal duty or into some legal relationship"; and (b) "resulted in it being vulnerable to the specific liability", such that there was a "real prospect" of that liability being incurred.

By analysing Support Liabilities in this way, the Supreme Court found that they were contingent liabilities, where the obligations had been incurred before the insolvency event took place. Presumably in the case of Lehman this occurred when the LBL service company structure was put in place.

Conclusion and Outlook

Following the decision of the Supreme Court, the parties negotiated a settlement deed which was signed on 14 August 2014. Under the terms of settlement, six Lehman companies to whom FSDs were issued will pay the Scheme trustees an amount which is expected to satisfy in full the Scheme's liabilities to its members, an amount estimated at £184 million. Proceedings at the Upper Tribunal have been indefinitely stayed and the Scheme is expected to be fully funded.

In the Lehman case, Support Liabilities relating to the Scheme were fairly small, especially when compared to the size of the Lehman group estate. Nevertheless pension scheme liabilities are often overlooked, even though they can be huge. Amongst FTSE 100 companies, the combined pension deficit as of June 2014 was £37 billion7. Such figures, which for many large institutions run individually into the billions8, will have a large impact on pay-outs to creditors on a winding up.

On the face of it, the end result of the Lehman pension litigation was not unsurprising, and most commentators, including the Regulator, consider that a fair outcome was achieved. Nevertheless, the ready imposition of Support Liabilities by the Regulator should serve as a reminder of the potential liabilities to those dealing with companies with defined benefit occupational pension schemes, especially if those schemes are in deficit.

This issue of banks and pension liabilities under English law came back into focus recently with the publication of the Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015. The draft regulations, which are currently under consideration by Parliament, complement the new ring fencing regulations9 which have the purpose of ring-fencing banks' retail and small and medium enterprise deposits in separate financial independent legal entities. Only applicable to banks which accept such deposits10, the new pensions rules seek to further protect those depositors by ensuring that ring-fenced banks are not, and cannot become, liable for another entity's pension liabilities, unless those liabilities arise from other ring-fenced banks in the group, or wholly owned subsidiaries of other ring-fenced banks in the group.


1 I.e. a company in a group of companies whose turnover is solely or principally derived from amounts charged for providing the services of its employees to other group companies.

2 At first instance, such appeals (technically known as "references") are made to the Upper Tribunal.

3 It was common ground that liabilities arising under an FSD or CN issued before the target entered into administration would be provable debts.

4 In particular the Insolvency Act 1986 and its accompanying statutory instrument, the Insolvency Rules 1986 (SI 1986/1925).

5 The Prescribed Part is a portion of the proceeds of a realisation of assets covered by a floating charge which must be set aside and applied in satisfaction of unsecured debts up to a maximum of £600,000.

6 Paragraph 99, Schedule B1, Insolvency Act 1986

7 Accounting for Pensions 2014, Lane Clark & Peacock LLP

8 The Supreme Court decision discussed above was actually a joined case with that of stricken telecommunications giant Nortel, where the UK pension debt was £2.1 billion.

9 Enacted by the Financial Services (Banking Reform) Act 2013. The regime is expected to come into force in 2019.

10 Certain other criteria, such as the size (in absolute terms and relative to the size of the bank in question) of the deposit business apply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Stephen Phillips
Events from this Firm
22 Aug 2018, Webinar, New York, United States

On July 1, 2018, new regulations from California’s FEHC went into effect, clarifying protections from national origin discrimination.

5 Sep 2018, Seminar, New York, United States

This seminar will discuss a variety of topics concerning the responsibilities and conduct of gatekeepers and will provide practical advice dealing with the government’s increased policing of the activities of gatekeepers.

13 Sep 2018, Speaking Engagement, New York, United States

Employment partners Tim Long and Erin Connell will be participating in PLI’s Cutting-Edge Employment Law Issues 2018: The California Difference.

Similar Articles
Relevancy Powered by MondaqAI
Charles Russell Speechlys LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Charles Russell Speechlys LLP
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions