UK Pensions - No further appeal expected in case about validity of amendments made to contracted-out schemes

As has been widely reported, the Court of Appeal has recently handed down a decision which potentially has implications for the validity of amendments made by schemes which were contracted-out on a salary-related basis between 6 April 1997 and the abolition of contracting-out in 2016.

No further appeal is now expected of this decision.

Trustees and sponsoring employers of such schemes will therefore need to consider the implications of this decision for past amendments made to their schemes, and whether there is any action they need to take in response.

Background

The case (Virgin Media Ltd v NTL Pension Trustees II Ltd) relates to the National Transcommunications Limited Pension Plan, which was contracted-out on a salary-related basis.

Before 6 April 1997, members of such schemes accrued rights to a guaranteed minimum pension. From 6 April 1997, such schemes instead had to meet an overall scheme quality test known as the reference scheme test. Rights accrued in these schemes are known as “Section 9(2B) rights” after the relevant section of the Pension Schemes Act 1993.

At the relevant time, Section 37 of the Pension Schemes Act 1993 and Regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996 meant that the rules of a salary-related contracted-out scheme could not be amended in relation to Section 9(2B) rights unless the actuary had provided written confirmation that the scheme would continue to satisfy the reference scheme test if the amendment were made. However, the legislation did not say what would happen if an amendment was made without obtaining actuarial confirmation and nor did it make clear the scope of Section 9(2B) rights or the types of amendment to which it applied.

On 8 March 1999, the Plan’s Second Definitive Trust Deed and Rules were executed. They included an amendment to reduce the rate of revaluation for benefits accrued after 8 March 1999. The parties had not been able to locate a Section 37 actuarial confirmation in relation to this amendment and so the question arose as to whether the change was validly made.

High Court decision 

The High Court was asked to determine three issues: 

• Issue 1: what was the consequence of failing to obtain actuarial confirmation?
  
  The High Court decided that the failure of a salary-related contracted-out scheme to obtain an actuarial confirmation required by Section 37 and Regulation 42 meant that the amendment was invalid and void.
• Issue 2: was the invalidity limited to changes in relation to rights attributable to service before the date of the amendment (past service rights) or did it also apply in relation to rights attributable to service after that date (future service rights)?
  
  The High Court decided that any change in relation to Section 9(2B) rights would be invalid and void; the invalidity was not limited to changes to past service rights.
• Issue 3: was the invalidity limited to adverse alterations to Section 9(2B) rights or did it apply in relation to all alterations to such rights? 
  
  The High Court decided that the requirement for actuarial confirmation applied to all amendments to Section 9(2B) rights and not just those which would or might adversely affect Section 9(2B) rights. All changes to Section 9(2B) rights (even where the changes could only improve such rights) are therefore invalid if no actuarial confirmation was obtained.

Virgin Media appealed the High Court decision on Issue 2, arguing that Section 9(2B) rights should be interpreted as comprising only past service rights in respect of contracted-out employment after 6 April 1997. This would mean that the requirement to obtain an actuarial confirmation did not apply to an alteration to the rules of a salary-related contracted-out scheme insofar as that alteration affected future service rights.

Court of Appeal decision 

The Court of Appeal has dismissed the appeal, confirming that that Section 9(2B) rights are not limited to past service rights, but also include future service rights.

Comments 

Trustees and sponsoring employers of schemes previously contracted-out on a salary-related basis will need to consider the implications of this case for past amendments made to their schemes, and whether there is any action they need to take in response.

The starting point is that the decision is only potentially relevant to deeds affecting benefits under contracted-out schemes made between 1997 and 2016. In practice, we would expect actuarial confirmation to have been obtained in most cases where it was needed.

Whether, following the case, a review should be carried out to identify any missing actuarial confirmations and the scope of that review will depend on the scheme’s current circumstances and the approach that trustees wish to take. We recommend that trustees take advice before deciding on next steps. Where, however, schemes have document destruction processes in place, they may wish to instigate checks before archive material is destroyed or permanently deleted.

It remains possible that the Government could issue regulations to regularise the position using an existing power under relevant legislation and industry bodies have made representations to the DWP on this issue. However, there has been no public comment from the Government and any action on this issue is unlikely to follow quickly.
 
We are also aware of another case coming to Court early next year which is expected to obtain clarification in relation to certain related aspects, such as the type of changes which are or are not alterations to Section 9(2B) rights and whether subsequent actuarial confirmations of the scheme as continuing to satisfy the statutory standard have the effect of validating earlier changes.

If you would like to discuss the issue further, please speak to your usual Linklaters contact.