The section 75 debt should be calculated using estimated insurance company annuity rates on the insolvency date and not the date of finalising the claim, the High Court of Justice ruled in the Kaupthing Singer & Friedlander Ltd case.

Kaupthing Singer & Friendlander (KSF) went into administration in October 2008, after which the trustees of the KSF’s pension schemes, the Singer & Friedlander Limited Pension and Assurance Scheme, made a claim under section 75.

Section 75 of the Pensions Act 1995 provides for an unsecured debt claim to arise on companies entering insolvency, based on the deficit in the pension scheme, valuing benefits by estimating the cost of buying-out the benefits by purchasing matching annuity policies from an insurance company.

Annuities changed substantially since October 2008, and in KSF’s case this was estimated to mean that the section 75 debt would have increased from about £74m to about £140m. As KSF was paying a significant dividend to unsecured creditors, including the trustee, a significant sum was at stake.

Justice Sales confirmed how the buy-out value of benefit liabilities should be calculated when trustees or the Pension Protection Fund bring claims against insolvent companies under section 75. He ruled the calculation should use estimated insurance company annuity rates on the insolvency date, which in this case is October 2008, and not the later date of finalising the claim, which is now.

Freshfields Bruckhaus Deringer advised the joint administrators of KSF, and pensions partner David Pollard said: “The administrators need to act properly for all creditors within the legal boundaries imposed on them. This meant that they needed to be certain about the amount of debt claimable. To allow too high a claim would reduce the amount payable to the other creditors.

“This is a sensible decision. As pointed out by the judge, it would cause many problems and not be very consistent if the date for estimating the annuity rates differed from the date the value of the scheme’s assets are fixed (the date of insolvency) and the date the level of benefits being provided are fixed (frozen as of the insolvency date). It would not be comparing like with like.”

The judge ruled that there was “overwhelming textual and contextual support” for using the annuity rates as at the insolvency date. In this case, annuity rates varied substantially over the period between the start of the insolvency process and the date section 75 debt is certified.

“Had the judge taken the opposing view, this would have added substantial uncertainty to the insolvency process,” Pollard added.

“This is also good news for actuaries. The evidence was that their common practice has been to certify the s75 debt using annuity rates at the insolvency date. If the case had gone the other way, so that later annuity rates should be used, it may well have exposed actuaries who had previously certified using the ‘wrong’ annuity rates to claims from either disgruntled beneficiaries (if, as in the KSF case, the annuity rates had got worse) or from other creditors/insolvency practitioners (if the annuity rates had got better).”

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