The judgment throws into question the validity of past amendments to pension schemes which were formerly contracted-out, if certain procedural requirements were not complied with.
Specifically, the case is relevant to rule amendments relating to “section 9(2B) rights” made between 6 April 1997 and 5 April 2013, plus any amendments to future service rights between 6 April 2013 and 5 April 2016 (when salary-related contracting-out was abolished).
Reminder: what are section 9(2B) rights?
“Section 9(2B) rights” are rights built up by members of salary-related contracted-out occupational pension schemes in respect of pensionable service between 6 April 1997 and 5 April 2016. Members’ benefits built up in this period must be at least as good as those provided by a reference scheme statutory standard (the so-called “reference scheme test”).
What procedural requirement did Virgin Media consider?
From 6 April 1997 to 5 April 2013, rule amendments in relation to any section 9(2B) rights required confirmation from the scheme actuary that the scheme would still meet the reference scheme test following the alteration. From 6 April 2013 to 5 April 2016, similar confirmation from the actuary was needed in relation to amendments to future service rights. None of the parties in the Virgin Media case had located confirmation from the scheme actuary in relation to rule amendments in 1999, and the court was asked to decide the position on the assumption that no such confirmation had been issued.
What did the High Court decide?
In June last year the High Court judge interpreted the legislation strictly, holding that where there was not the required confirmation from the actuary, the amendments were void in respect of both past and future service. It made no difference that the purported amendments would not have any adverse effect on section 9(2B) rights.
The Court of Appeal held that the High Court judge had reached the right conclusion in her “impressive judgment” and dismissed the appeal.
What comes next?
The concern that past amendments may be void could be readily resolved by an alteration to the contracting-out regulations. We are aware of an industry working group liaising with the Department for Work and Pensions (DWP) about the implications of the judgment and how to validate past amendments through legislative change. The DWP has power to bring forward regulations to validate retrospectively scheme amendments which may not have satisfied the legislative procedural requirements.
Do trustees and sponsoring employers need to take any action?
Trustees and sponsoring employers of schemes which were contracted-out on a salary-related basis and which underwent rule amendments between April 1997 and April 2016 may wish to wait for any clarification from the DWP before taking further action.
If helpful news from the DWP is not forthcoming, you may wish to check your records for written confirmation from the scheme actuary in relation to the amendment. There may also be evidence of confirmation having been given, for example in the recitals to the deed of amendment, or there may be correspondence asking the scheme actuary to consider the deed in draft. In practice, scheme actuaries were usually kept in the loop in relation to scheme amendments – not least because amendments to benefit rules often required an actuarial certificate under section 67 Pensions Act 1995, and also as an actuary’s certificate was needed every three years confirming that the scheme continued to satisfy the reference scheme test.
If you do look back at previous rule changes, please bear in mind that no actuarial confirmation was needed for administrative or other amendments unrelated to section 9(2B) rights, for example the addition of a power to agree an apportionment of past service liabilities to a different participating employer, or a change to the scheme’s name.
Authored by the Pension Team.
