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High Court dismisses challenge to scheme actuary's section 75 calculations
Practical Law UK Legal Update 4-382-0202 (Approx. 5 pages)
High Court dismisses challenge to scheme actuary's section 75 calculations
by PLC Pensions
| Published on 27 May 2008 • England, Scotland, Wales |
In Gleave and others v Board of the Pension Protection Fund [2008] EWHC 1099 (Ch), the High Court has ruled that the supervisors of company voluntary arrangements approved by the creditors of the Federal Mogul Group cannot challenge certifications of claims arising under section 75 of the Pensions Act 1995 made by the actuary of the T&N pension scheme. The section 75 claims, which related to a funding shortfall in the scheme, arose when 14 companies in the Group withdrew from participation in the scheme in July 2004. The actuary had certified the amounts of the claims in March 2006.
The supervisors had argued they were entitled to value the claims as they saw fit. In particular, they had taken issue with the mortality assumptions used by the scheme actuary. But the court held that the supervisors should allow the section 75 claims in the amounts fixed by the actuary, under the "hindsight principle" derived from existing case law.
Background
In some circumstances, the trustees of a salary-related scheme may claim against the scheme's employers for a shortfall in the scheme's assets. The trustees' claim counts as a debt on the employer (known as a section 75 debt), and can arise in two situations:
- When a scheme starts to wind up. In this case, the section 75 debt is equal to the buyout deficit in the scheme, as estimated by the scheme actuary.
- When a participating employer ceases to participate in a multi-employer scheme and the scheme remains ongoing. The legislation describes this as an "employment-cessation event". The employer will be responsible for its share of the section 75 debt, again calculated on the buyout basis, unless the employer enters into an alternative arrangement allowed by legislation.
The main legislative provisions relating to employer debts are contained in section 75 and 75A of the Pensions Act 1995 and regulations made under these sections. The applicable regulations depend on the date the section 75 debt arose:
- The Occupational Pension Schemes (Deficiency on Winding Up etc) Regulations 1996 (SI 1996/3128) (the Deficiency Regulations) for employer debts that arose before 6 April 2005.
- The Occupational Pension Schemes (Employer Debt) Regulations 2005 (SI 2005/678) (the Employer Debt Regulations) for employer debts that arose after 6 April 2005.
(The 2005 regulations were substantially amended with effect from 6 April 2008 (see Legal update, The employer debt amending regulations: what do they do?).)
If a scheme's sponsoring employer experiences a qualifying insolvency event, the scheme may be eligible to enter the Pension Protection Fund (PPF). If admitted to the PPF, scheme members receive compensation at prescribed levels and the PPF assumes the responsibilities of the trustees. These include any claims against the scheme's employer for a section 75 debt. For further background, see Practice note, Pension Protection Fund: overview.
Facts
On 7 September 2006, company voluntary arrangements (CVAs) proposed under the Insolvency Act 1986 were approved by the creditors of 51 companies in the Federal Mogul Group. The CVAs formed part of the rescue of viable parts of the group, after large asbestos-related liabilities led to 133 group companies entering administration on 1 October 2001. These companies included several subsidiaries of T&N Ltd.
A general reserve was established for the benefit of all creditors with unsecured claims against T&N Ltd, subject to certain exceptions including asbestos-related claims (which were to be made against a separate trust fund) and the primary claim of the trustees of the T&N pension scheme, which arose under section 75 of the PA 1995 in relation to a funding shortfall in the scheme. It had been agreed that the trustees' claim was to be compromised by the payment of £193 million plus interest, to be made shortly before the CVAs took effect.
In addition, the general unsecured claims against group companies other than T&N included separate claims by the pension scheme trustees against 14 companies which were formerly participating employers in the T&N scheme. These claims had also arisen under section 75 of the PA 1995, but in different circumstances: they had been triggered when the 14 companies withdrew from participation in the scheme on 16 July 2004. Under the Deficiency Regulations, the section 75 claims had to be quantified by the scheme actuary, who was required to calculate the claims (and apportion them between the employers) by making estimates of the scheme's relevant assets and liabilities as he thought appropriate and certify his results. The actuary provided the necessary certifications and apportionments in March 2006.
Under the terms of the CVAs, the claims against the 14 companies were to be proved in the same manner as any other general claims, and paid at the same dividend rate.
The supervisors took issue with the amounts of the section 75 claims certified by the scheme actuary, primarily in relation to the mortality assumptions used by the actuary in calculating the section 75 claims. According to the supervisors, if the actuary had used their preferred assumptions, the aggregate claims would be reduced from around £94 million to around £84 million.
Submissions of the parties
It was common ground that in valuing contingent claims as at 1 October 2001 under the CVAs, account must be taken of those subsequent events which could bring greater certainty to the process of estimation - known as the "hindsight principle".
The supervisors argued that the hindsight principle applied only to the extent of taking into account the withdrawal of the 14 companies from the scheme in 2004, which had thereby triggered the section 75 debts. They argued that the date as at which the claims were to be determined under the CVAs was 1 October 2001, and the trustees' claim fell to be treated as a contingent claim to be valued by the supervisors. Although the actuary's certification and apportionment in March 2006 were relevant for the estimation process under the CVAs, it was for the supervisors to estimate the claims and they were not bound by the actuary's certifications. In valuing the claims, the supervisors maintained that they could use such principles and assumptions as appeared appropriate, after taking actuarial advice.
The PPF (who had assumed the trustees' responsibilities following approval of the CVAs) argued that as at 1 October 2001 there was a contingent liability under section 75 to pay the amount certified by the actuary. In estimating the claim, the supervisors were as much estimating the amount the actuary would certify as they were estimating the chances that a section 75 claim would be triggered by withdrawal or liquidation. Therefore, in the PPF's submission, the claims due from the 14 companies should be admitted by the supervisors in the amounts certified by the actuary, to be paid from the general unsecured claims funds.
Decision
The court found in favour of the PPF. As a matter of general application of the hindsight principle to contingent debts, the supervisors should allow the section 75 claims in the amounts fixed by the scheme actuary, subject only to the provisions for caps in the CVAs. There were also specific features of CVAs and section 75 that supported the court's conclusion.
Referring to Lord Hoffmann's speech in Stein v Blake [1996] AC 243 at 252 E-G, the first technique for dealing with contingent liabilities was:
"to take into account everything which has actually happened between the bankruptcy date and the moment when it becomes necessary to ascertain what, on that date, was the state of account between the creditor and the bankrupt. If by that time the contingency has occurred and the claim has been quantified, then that is the amount which is treated as having been due at the bankruptcy date." (emphasis added)
There was nothing in the rationale underlying the hindsight principle that should restrict its application to whether an initial triggering event had occurred (here the withdrawal from participation of the 14 companies). The subsequent quantification of the section 75 claims by the actuary was equally a matter which rendered certain what was previously uncertain, and so should be relied on by the CVA supervisors.
Comment
Many insolvency practitioners have difficulties with the principles governing quantification of section 75 claims, given the latitude given to the scheme actuary in making the calculations. The process is simply one of estimation - the actuary must estimate the cost of buying out the scheme's liabilities in full with an insurance company - and several different actuaries could arrive at different claim figures, each as valid as the other. Provided the actuary adheres to accepted practice (including published professional standards) and uses assumptions that are reasonable, his or her certifications cannot be challenged.
This case arose because the supervisors of the CVAs took another route to challenging the actuary's certifications, arguing for a very limited application of the hindsight principle. Given the existing line of authorities on this point, the court took little time to find in favour of the PPF and it is perhaps unlikely that the case will go to appeal.