British retirement savers with workplace pensions in firms that go bust have lost their financial protection in a landmark court case.
The Supreme Court, the nation’s highest court, has finally decided that pension savers have no special protection as creditors of a company that goes into liquidation.
For millions of retirement savers, that means they are not given any special consideration when a firm is insolvent.
The pecking order for assets, the court decided, is first secured creditors and then unsecured creditors – and pension members are unsecured creditors.
The case came about when the British subsidiaries of UK bank Lehmann Brothers and Canadian telecoms company Nortel went bust.
Shunned lending
The Pensions Regulator wanted to grab the pension assets of both companies for workers and pensions relying on the in house schemes.
However, the administrators in both cases disputed the regulator had the power to do so.
The case has spent the past five years in negotiation and passing through the lower courts.
Lehmann Brothers owed £148 million and Nortel £2.1 billion to their pension funds when they entered insolvency.
“Banks should feel better about lending to companies now they know for sure that the pensions regulator cannot come in and grab assets ahead of them,” said Devi Shah, a partner at law firm Mayer Brown.
“Had the ruling gone in favour of the regulator, banks could very well have shunned lending to companies even more than they do now.”
Pension Protection Fund
The court remarked that paying off massive pension deficits would leave most businesses with little in assets for other creditors and pension saves already had extra financial safeguards from the Pension Protection Fund.
Both the pension schemes are already managed by the Pension Protection Fund (PPF).
The PPF pays different amounts of compensation to retired workers depending on their employment and marital status at the time the scheme went into protection.
Generally, if someone has already retired, their pension carries on without change, but for early or new retirees, the level of benefits paid is a percentage of the amount they could otherwise have expected to receive.
Pension payments are capped at 90% with a maximum annual payment of £31,380.34.
In general, the case was a test to see if the pension regulators could move up the queue of creditors to seize assets for pensioners to save funding their pension payments from other funds held by the PPF.
