The recent decision of the High Court in Virgin Media Limited v NTL Pension Trustees II is an important case for formerly contracted-out defined benefit schemes.
The effect of the absence of an actuarial confirmation under section 37 of the Pensions Schemes Act 1993 has been the subject of uncertainty for some time. The High Court has now given a first view on the relevant legislation.
Gowling WLG (UK) LLP acts on behalf of Virgin Media Limited and we argued for the minimal impact on an amendment in the absence of an actuarial confirmation. We discuss the case in more detail in this article.
Background
In broad terms, the effect of section 37 of the Pensions Schemes Act 1993 and Regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996 was that, to make alterations to the rules of a salary-related contracted-out pension scheme in relation to "section 9(2B) rights", the actuary had to confirm in writing that the scheme would continue to satisfy the statutory standard (i.e., the "reference scheme test") after the alteration had been made. The purpose was to make sure that schemes continued to satisfy that minimum standard after an amendment was made if they wanted the ongoing benefits of being "contracted-out".
"Section 9(2B) rights" are rights to the payment of pensions and accrued rights to pensions in respect of contracted-out employment from 6 April 1997.
The issues
In 1999, alterations were made to the rules of the National Transcommunications Limited Pension Plan (the "Plan"), some of which were intended to apply retrospectively to a date before the deed making the alterations was executed.
It was accepted by the parties that the alterations could not take effect retrospectively because of a limitation in the Plan's power of amendment. However, an issue arose as to whether the alterations took effect prospectively. The case proceeded on the basis that no actuarial confirmation was provided further to section 37/Regulation 42 when the alterations were made.
The Court was asked to decide three questions, which it did in the ways set out below.
- Did section 37 render alterations made in the absence of a written actuarial confirmation contemplated by Regulation 42 void to any extent?
Yes.
- Was any voiding effect limited to retrospective changes such that the absence of a confirmation invalidated alterations to benefits already accrued at the date of the alteration but alterations to benefits to be earned by future service remained valid?
No. Alterations to rights earned by past service and alterations to benefits to be accrued by future service after the date of the alteration are both void in the absence of an actuarial confirmation.
- Was any voiding effect only in relation to adverse alterations to section 9(2B) rights or in relation to all alterations to such rights (e.g. including alterations that may have improved rights)?
Alterations improving and reducing benefits are both void.
Comment
The Court decided that, in so far as any alterations in relation to section 9(2B) rights were introduced without the written actuarial confirmation contemplated by Regulation 42, the amendments are void to the maximum possible extent. It did not matter whether, as a matter of substance, the amendments made by the deed had the effect of reducing benefits below the reference scheme test, being the mischief the legislation was there to protect against, or not.
It is not yet known whether the judgment will be appealed, whether other cases will come to court in which parties seek a different outcome or whether steps will be taken by Parliament or the Government to change the law in response to this decision given that the effect would seem to go beyond the original policy intent.
It also remains unclear as to exactly what would constitute confirmation from the actuary for the section 37/regulation 42 purposes in any particular case, and there is still the potential for that to be drawn quite widely.
Footnote
[] This was the assumption for the purposes of the case