A recent court decision has ruled that pension funds are no longer to be treated as preferential creditors in insolvency situations. In the past the Pensions Regulator used a mechanism known as the "Financial Support Direction" (FSD)
The verdict was the result of a case brought by the administrators of the UK divisions of investment bank Lehman Brothers and Canadian telecoms group Nortel. This is a very important case as in many cases companies in insolvency have pension fund deficits. This does not mean that pension holders themselves are in a worse financial situation as the Pension Protection Fund (PPF) will still have to meet any shortfall. This will mean, of course, more pressure on the PPF.
Nortel, the Canadian firm which collapsed in 2009, had a £2.1bn shortfall in its European scheme. The pension entitlements of more than 40,000 workers were implicated. The funding gap at the UK division of failed investment bank Lehman was far smaller at £148m.
Giles Frampton of R3, the insolvency trade body, said: "The Nortel decision is to be welcomed in that it appears to restore a fair balance between the rights of pension funds and other creditors in administrations."
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