Validity of past amendments to contracted-out schemes

The Court of Appeal has handed down a significant judgment on the effectiveness of historic amendments to contracted-out defined benefits (“DB”) pension schemes, which upholds last year’s High Court ruling on the issue. Trustees, and potentially employers, will need to consider the impact of the decision.

The background

Under section 37 of the Pension Schemes Act 1993, the rules of a salary-related contracted-out scheme could only be altered in relation to “section 9(2B) rights” if the trustees informed the scheme actuary of the proposed changes and the actuary confirmed in writing that the scheme would continue to satisfy the statutory standard under that section, which was based on rights under a notional reference scheme.

Section 9(2B) rights were defined for these purposes as rights to payment of pensions and “accrued rights” to pensions attributable to contracted-out service from 6 April 1997.

In Virgin Media v NTL Pension Trustees II, a scheme rules re-write was executed in 1999. On the assumption that no actuarial confirmation had been obtained, the Court was asked whether amendments purportedly made as part of the re-write (in particular, changes to scheme revaluation) remained valid.

The original ruling

Last June, the High Court held that:

• where the required actuarial confirmation was not supplied, section 37 rendered the relevant amendment void;
• the rights in relation to which actuarial confirmation had to be obtained included both past and future service rights; and
• the requirement for actuarial confirmation applied to all amendments to the rules of a contracted-out scheme in relation to section 9(2B) rights, not just those which would or might adversely affect them. 

While there had been some uncertainty as to how the legislation should be interpreted, by applying a wide interpretation of the legislation, the High Court decision meant that the scope of the confirmation, and the impact where it was not obtained, was wider than many had thought.

The Appeal Court’s view

The appeal in this case was limited to the second bullet point above - whether the section 9(2B) rights in relation to which actuarial confirmation had to be obtained, despite use of the phrase “accrued rights”, in fact included both past and future service rights.

In a very comprehensive lead judgment, giving a detailed history of the relevant contracting-out provisions, Lord Justice Nugee, a very well-known and highly respected pensions barrister before he became a judge, concluded that they did. The other Court of Appeal judges agreed.

The judgment discusses the case law on statutory interpretation: the Court accepted that this was one of those cases where it was appropriate not to begin with the ‘natural’ meaning of a particular phrase but to carefully consider the ‘wider legislative purpose and scheme’ of the statutory provisions in addition to the precise wording used.

Analysis

The Court of Appeal’s conclusion is clearly important - and unwelcome for many in the pensions industry.  It confirms that many amendments, if made without a section 37 confirmation having been prepared, are on the face of it void. It will not always be straightforward to identify precisely which changes are caught by the restriction.

Trustees and employers of formerly contracted-out DB schemes need to consider the impact on their own scheme and, if they have not done so already, may wish to review past deeds of amendment to confirm whether they affected section 9(2B) rights and, if so, that the appropriate actuarial confirmations were obtained.

Where potential ‘problem’ deeds are identified, trustees and employers will need to consider what if any steps to take in light of the judgment and its finding on the role of trustees, employers and actuaries in making changes to pension schemes that complied with the section 37 requirements and the Government’s intentions.  These might include, for example, investigating which deeds might be caught by the decision and what process was followed. If there are potential claims against those involved at the time, trustees should carefully consider possible time limits on bringing those claims and whether, for example, deeds identified are approaching 15 years since execution.  

The judgment also means that the question of historic section 37 confirmations will continue to be a critical issue in scenarios like benefit specification reviews on buy-in, moving from buy-in to buy-out, DB bulk transfers, PPF entry or corporate transactions involving pension schemes.

While it is possible that a further appeal to the Supreme Court or even Parliamentary intervention could still offer a solution to some of the arguably unintended consequences of these Court decisions, it is not clear if or when that might happen.

For further information, please get in touch with your usual CMS contact.