The Court of Appeal has given its ruling in the Virgin Media case (see our alert). This concerned the validity of a rule amendment affecting benefits in a defined benefit contracted-out scheme which was made without obtaining the actuary's written confirmation that contracting-out requirements would still be met, as required by section 37 of the Pension Schemes Act 1993. Such confirmations were required for amendments made between 6 April 1997 and 5 April 2016. The Court of Appeal confirmed that confirmation was required for changes to future service benefits (as well as changes to past service benefits).
Trustees and employer of other schemes will want to know what might happen next, whether or not they themselves are affected, and what they should now be doing. We hope that the following Q&As will be helpful.
1. Will there be an appeal to The Supreme Court?
We do not yet know. An application can be made within 42 days of the date of the Court of Appeal's judgment (though this period can be varied by the Supreme Court). This means that we should know by Friday 6th September 2024.
The Supreme Court then considers whether or not to accept the appeal, with no deadline. It might accept it on the basis that it is a case of very considerable importance. Or it may decline on the basis that the Court of Appeal bench included very experienced pensions specialist judges whose judgments ought to be accepted. But it would carefully consider the merits and we simply do not know.
2. Will the Government intervene?
Section 37 of the Pension Schemes Act 1993 expressly allows the Secretary of State for Work and Pensions to make regulations "so as to validate with retrospective effect any alteration of the rules which would otherwise be void under this section".
The Government did not intervene after the High Court judgment, presumably because the Court of Appeal might have resolved the matter. We therefore would not expect intervention while any further appeal is possible or ongoing. But an industry group that has been engaging with the Department for Work and Pensions on the implications of the case has put forward proposals as to how the difficulties could be resolved by regulations.
3. Does the decision apply to amendments closing a scheme to future accrual?
Neither the High Court nor the Court of Appeal judgment give any clues to this.
But we think it is strongly arguable that an amendment to close a scheme to future accrual is not within section 37 because that is not an amendment in relation to future section 9(2B) rights: the whole point of the amendment is that for future service there are no section 9(2B) rights.
A confirmation would, however, have been required in respect of past service rights at least if the final salary link was being ended.
4. What about amendments that improved benefits for members (or some of them)?
The High Court held that its decision applies to these kinds of amendment too. This point was not appealed, so it stands and can only be overturned by the Court of Appeal in another case.
In some cases, there could be a setting off of invalid favourable amendments against invalid adverse amendments.
5. Can the actuary give the confirmation now?
No. The legislation said that the rules could not be altered in relation to contracted-out rights unless the trustees have (past tense) informed the actuary in writing and the actuary has considered and has confirmed (again, past tenses).
6. Do we need to check historic amendments?
There is a good argument that there is no duty on trustees to check whether or not actuarial confirmations were given for historic benefit rule amendments.
Increasing external pressures in light of the Court of Appeal's decision are, however, likely to mean that in practice trustees should check. For example, trustees may be asked about this by auditors and it is very likely to arise as a question in a buy-in/out exercise or scheme merger, or if there is a corporate transaction affecting the scheme.
In all those circumstances, trustees might need to make the checks in very short order. And it would be better to understand now whether or not there is any issue. We therefore think it is advisable to start that work as soon as practicable. Please ask your usual Travers Smith contact for assistance, if required.
The following considerations may be helpful when undertaking these checks:
- The confirmations were only required for amendments affecting defined benefit contracted-out rights that were made between 6 April 1997 (when the 'reference scheme test' regime began) and 5 April 2016 (when contracting-out was abolished).
- For amendments made between 6 April 2013 and 5 April 2016, the confirmation only needed to address future service benefits, not past service benefits, so the form of wording might be different.
- The confirmation did not need to be in the form of a certificate but it did need to be in writing. That could include an appropriately worded letter or email.
- There was no need for the confirmation to be appended to the deed of amendment or even retained.
- If a deed recital (or even correspondence) says that the actuary has given the confirmation then that should be enough to show that the requirement has been satisfied, assuming of course that there is no evidence to the contrary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
