Summary of the judgment
The pension scheme was amended in 1999 and no actuarial confirmation that it continued to comply with contracting-out requirements could be found.
The amendment was for pension earned for future service to have a lower rate of revaluation.
The case raised three issues relating to contracted-out rights:
- Is an amendment void if the trustees did not obtain an actuarial confirmation?
- Is this the case only in relation to changes to pension already accrued or is actuarial confirmation needed in relation to changes to future service pensions?
- Is this the case only in relation to changes which have an adverse effect on contracted-out rights or does it apply to all changes in relation to contracted-out rights?
The High Court decided in relation to contracted-out rights:
- An amendment made without the actuarial confirmation was void.
- This is the case for changes in relation to both and future service rights.
- This is the case for all changes to contracted-out rights and not merely to changes that would or might affect contracted-out rights adversely.
On July 20, 2023, Virgin Media was granted permission to lodge an appeal, but it could be many months before an appeal is heard.
Content
- Impact of the judgment
- What are section 9(2B) rights?
- How were changes effected in practice?
- What if the appeal is not successful?
- What action, if any, should be taken by trustees and sponsoring employers pending this appeal?
Impact of the judgment
The judgment confirms that rules related to contracted-out benefits cannot be altered without the statutory actuarial confirmation having been obtained and that non-compliant alterations are void.
The judgment impacts changes “relating to” section 9(2B) rights made between April 6, 1997, and April 5, 2013. Arguably it also applies, by extrapolation, to any changes to future service rights between April 6, 2013 (when the legislation was changed to require a certificate for changes to future services rights only) and April 5, 2016 (when salary-related contracting-out was abolished).
What are section 9(2B) rights?
Section 9(2B) rights are benefits earned by members of salary-related contracted-out occupational pension schemes in respect of pensionable service between April 6, 1997 and April 5, 2016. Members' benefits earned in this period must be at least as good as those provided by a reference scheme statutory standard (known as the “reference scheme test”).
How were changes effected in practice?
While no actuarial confirmation was needed for administrative or other amendments “not” related to section 9(2B) rights, for example, changes to administration, the addition of trustee powers or to the scheme's name, the judgment casts doubt on whether such changes would be valid, if the deed also made changes relating to section 9(2B) rights without the required actuarial confirmation.
Common practice has been for schemes to have discussed whether a certificate was required with the scheme actuary and concluded whether or not one was necessary ahead of making scheme changes. The judgment now potentially brings this practice into question, including changes made in good faith on the basis that no actuarial confirmation was required, for example where changes made between 1997 and 2013 impacted the future only (e.g. where the scheme was closed to future accrual, in which case the law required the scheme's contracting-out certificate to be surrendered and therefore no past or future service rights were being affected by the closure to accrual) or where the contracted-out rights were not adversely impacted.
The judgement was also predicated on the basis that no actuarial certificate had in fact been provided in respect of the particular deeds referenced in the case. There was no commentary about what the position may be where a certificate may be referred to (for example in the recitals to the deed) but simply cannot be located.
It is hoped that the appeal will provide clarity on these important issues for schemes.
What if the appeal is not successful?
If the decision is not reversed (or clarified) on appeal, there is also a route for the DWP to promote regulations to allow retrospective actuarial confirmations that schemes would have continued to comply with the reference scheme test in relation to any historical deeds of amendment where there may be doubt as to whether the actuarial certification was provided at the relevant time.
What action, if any, should be taken by trustees and sponsoring employers pending this appeal?
In the meantime, what action, if any, should trustees and sponsoring employers take – especially schemes which are in the process of restructurings, particularly a total buy-in or buy-out?
For ongoing schemes, we think it makes sense for trustees and employers to await the outcome of the appeal before taking any steps to assess whether the case could impact on scheme's liabilities.
For schemes approaching the end-game, it may depend on the views of the insurer or the employer's willingness to provide indemnity protection, as to whether a wholesale review of historic deeds is required.
Whilst the decision (if not reversed or clarified), could result in further liabilities, a detailed review would be required, which would be expensive, take time and may ultimately prove unnecessary depending on the status of the appeal. It is also likely that a review would not give complete certainty as, as with most schemes, full records including contemporaneous actuarial advice may not exist. Further complications could exist for schemes with transferred in benefits or complex structures arising from historic mergers. A full review may simply be impossible.
We are continuing to follow any appeal of the judgment and can advise clients further if necessary.
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.