UK Pensions - Validity of amendments made to contracted-out schemes questioned
The High Court has 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. It is possible that the decision will be appealed or that the Government will intervene to address the issue, so the impact may be uncertain for some time to come. However, trustees and sponsoring employers should be aware of the issue.
The case (Virgin Media Limited v NTL Pension Trustees II Limited and others) relates to the National Transcommunications Limited Pension Plan (the 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 which provides for these rights.
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.
On 8 March 1999, the Plan’s 1999 Deed & Rules were executed. They included an amendment to reduce the rate of revaluation for benefits accrued after 8 March 1999. The parties have 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.
The court was asked to determine three issues:
- Issue 1: what was the consequence of failing to obtain actuarial confirmation?
The 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 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 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.
Trustees and sponsoring employers of schemes previously contracted-out on a salary-related basis will want to understand the implications of this case for past amendments made to their schemes. However, it may be some time before the legal position is certain. This is because, firstly, the decision could be appealed, and we are unlikely to have clarity on whether there is going to be an appeal for some time. Secondly, there is a regulation-making power under Section 37 which allows regulations to be made validating (with retrospective effect) any rule amendments which would otherwise be void. It is open to the Government to use this power to regularise the position, although it is currently unclear whether it would be willing to do so or what the timescale for this might be.
It is also worth noting the following points, which will impact on whether there is an issue in any given case (and, if so, the extent of the issue):
- There was no decision in this case as to whether an actuarial confirmation was in fact issued at the relevant time; the court was asked to proceed on the assumption that no such confirmation was issued. It is possible that the parties may be able to show that, for example, actuarial confirmation was obtained but has since been mislaid. Depending on the factual circumstances and the available evidence, this may be sufficient to save the amendments in this (and other) cases.
- In this case, the 2010 Deed & Rules (executed on 21 June 2010) appended the required actuarial confirmation, so the question of validity of the 1999 Deed & Rules only affects Plan members with pensionable service between 8 March 1999 and 21 June 2010. For other schemes, the factual matrix may mean that periods of service affected by a failure to obtain actuarial confirmation are similarly limited.
- Section 37 and Regulation 42 have changed over the years, so an amendment may be void if made in one period but valid if made at another time.
If you would like to discuss the issue further, please speak to your usual Linklaters contact.