The High Court has handed down an important, and potentially problematic, judgment on the effectiveness of historic amendments to contracted-out DB pension schemes. Trustees will need to work with their advisers to consider the impact of this decision on their scheme.
Under section 37 of the Pension Schemes Act 1993, the rules of a salary-related contracted-out scheme could not be altered in relation to “section 9(2B) rights” unless the actuary had confirmed in writing that the scheme would continue to satisfy the statutory standard. Section 9(2B) rights are rights attributable to contracted out service from 6 April 1997 and the statutory standard is a benefits test based on rights under a notional “reference scheme”.
This actuarial confirmation is often referred to as a “section 37 certificate” and such a certificate is often found attached to deeds of amendment from 6 April 1997. However, until today there was no case law assisting with the questions of which types of amendment needed the actuary’s confirmation, and the precise consequences of failing to comply with the condition in section 37.
Virgin Media v NTL Pension Trustees II concerned a scheme trust deed and rules rewrite executed in 1999. The Court was asked, on the assumption that there was no actuarial confirmation for that deed, whether amendments purportedly made as part of the rewrite (including changes to revaluation increases) were void and, if so, to what extent.
What did the Court hold?
The Court found that where the required actuarial confirmation was not supplied, the effect of section 37 was to render the relevant amendment invalid and automatically void. It also held that the references in the legislation to section 9(2B) rights (in relation to which actuarial confirmation had to be obtained) included both past and future service rights.
The judge went on to decide that the requirement for actuarial confirmation applied to all amendments to the rules of a contracted-out scheme, not just those which would or might adversely affect section 9(2B) rights. This extends, possibly significantly, the scope for amendments to be void where there is no actuarial confirmation.
The somewhat draconian outcome of the case is arguably not what Parliament intended. Nonetheless, the Court has determined what the wording of the legislation means and so trustees of formerly contracted-out DB schemes should consider the impact on their own scheme.
The industry will need time to digest the full impact of this decision and, whilst it is not yet known if the case will be appealed, trustees may be reluctant to take material action whilst there remains the possibility of a successful appeal or Parliamentary intervention. However, trustees may wish to review past deeds of amendment to confirm whether the appropriate actuarial certifications were obtained. If there is insufficient evidence of this, further enquiries may be required given the possible implications for benefit changes made by past deeds.
Importantly, the requirements under section 37 have changed over the years, and so it does not necessarily follow that a Court would reach the same conclusion in every case.
The judgment also means that the question of historic section 37 confirmation is likely to become an even more critical issue in scenarios like benefit specification review on buy out, DB bulk transfers, PPF entry or corporate transactions involving pension schemes.
For further information, please get in touch with your usual CMS contact.