Insolvent employer's debt to pension scheme should be calculated with reference to insolvency date

In his judgment, Mr Justice Sales said that to do otherwise would ignore the "conceptual nature" of a pension scheme valuation when the debt is triggered by an insolvency event. The scheme was sponsored by Iceland-owned bank Kaupthing Singer & Friedlander, which was put into administration in October 2008.

Pensions law expert Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com, acted for BESTrustees plc, the independent trustee of the pension scheme. He said that the judge's "clear guidance" would enable the trustee to certify the debt and confirm what benefits would be paid to the scheme members.

"Since there were large amounts of money at stake and both parties owe fiduciary duties to their beneficiaries, it was considered appropriate to seek the court's determination of this question," he said. "While the scheme's own circumstances are fairly unique, the decision will be of general application to trustees who are required to certify section 75 debts which are triggered by the insolvency of the sponsoring employer."

Section 75 of the Pensions Act 1995 creates a debt owed to the trustee of an occupational pension scheme by its sponsoring employer when certain 'trigger' events occur, which can include corporate restructuring as well as insolvency. This debt is calculated by setting off the 'buy out' valuation of the scheme's liabilities against the value of the assets currently held by that scheme.

The buy out valuation of pension liabilities is the cost of going into the market to purchase annuities, or insurance policies that would match those liabilities, from insurers. Mr Justice Sales said that this valuation will generally be "significantly higher" than when a scheme is valued on an ongoing basis, which assumes that the sponsoring employer and scheme members will be continuing to contribute to the scheme and does not have to take account of changing circumstances such as life expectancy.

The cost of buying annuities can change substantially between the date of insolvency and the date when the value of the employer's debt is certified, which may be several years later depending on the length of time taken by the scheme actuary's investigations. The cost of buying annuities to cover the liabilities of the Kaupthing scheme is currently almost £75 million higher at today's annuity prices than it would have been when the bank was placed in administration in 2008, according to the judgment.

Mr Justice Sales said that calculating the amount of the employer's debt with reference to the certification date would ignore the "conceptual nature" of the exercise, instead tries to treating it as if the scheme's actuary actually went into the market to buy annuities to meet the scheme's liabilities according to his advice on the date that he gave it.

The trustee argued that as the valuation could just as likely decrease as increase between the date of the insolvency and the certification date there would be "no intrinsic unfairness" in using the certification date as the reference point. However, the judge said that on this interpretation "no-one could know with any certainty" what the amount of the debt was likely to be until it was eventually certified.

"It would be surprising if the legislator set out to produce this result by regulations intended to operate in the context of the general insolvency regime, in which administrators and liquidators generally need to be able to assess the assets and liabilities of an insolvent company reasonably promptly and will wish to make distributions to creditors as speedily as possible," he said.