A three day hearing has begun at the Supreme Court today to determine where the claims of UK defined benefit pension schemes lie in relation to a firm’s insolvency.

The issue stems back to the collapse of Nortel Networks which entered administration in 1999 after its capital structure became unsustainable. This led the Pensions Regulator to issue a financial support direction (FSD) to Nortel Networks for it to support its pension scheme.

A financial support direction issued under section 43 of the Pensions Act 2004 requires the recipient to put forward a proposal for financial support for a defined benefit scheme in order to address funding deficiencies. Where a proposal for reasonable financial support is not submitted, a Contribution Notice (CN) may be issued under section 47 on the Pensions Act 2004.

Nortel has argued that it should not be forced to support the Nortel Pension Scheme in expense of administration however.

The Supreme Court is to decide through the course of the hearing whether to uphold this argument and for an FSD to move behind all other interests with regards to a scheme’s insolvency, or to rule that Nortel should provide support to the defined benefit scheme which has a £2.1bn section 75 deficit.

PwC partner and adviser to Nortel Networks UK pension interests Jonathon Land said: "The ranking of FSDs has remained a key area of contention over the past few years. The final ruling could have a significant impact on the ways in which pension schemes look to safeguard themselves against insolvency situations. The knock on impact could be far reaching, affecting insolvency practitioners and the restructuring more widely."

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