Following the Court of Appeal’s decision to uphold last year’s High Court decision in the Virgin Media v. NTL Pension Trustees case, we were delighted to have the opportunity to quiz Neon Legal’s pensions law expert Loren Ward on what this means for defined benefit (DB) pension schemes, and what actions, if any, should now be considered by trustees and sponsoring employers.
Q: Hi Loren. Thanks for taking the time to share your thoughts on this very topical issue. Could I start by inviting you to introduce yourself and Neon Legal to our readers?
A: Hi David. Thank you for having me. Of course, I’m Loren Ward, a pensions solicitor at Neon Legal, where I have worked since 2021.
Neon Legal is an independent, specialist, pensions only law firm based in Newcastle. We work closely with sponsoring employers, trustees of pension schemes, and other professional advisers providing expert advice on a wide range of pension arrangements, from occupational and personal pension schemes to public sector pensions. Our independent approach allows us to deliver tailored, high-quality legal services to our clients.
Q: Thank you. Before we start to think about what actions may be required, could you provide a summary of the position, including which schemes might be affected by the rulings and any key dates that we should all be aware of in this respect?
A: It may be useful if I provide some context to help frame the situation, David. Only schemes that were “contracted out” are affected. Since 1978, DB pension schemes could opt out of the additional state pension, originally known as SERPS. From 6 April 1997 until contracting-out ended on 6 April 2016, these schemes had to pass a “reference scheme test” to maintain their contracted-out status. This test ensured that the pension scheme provided at least a minimum level of benefits, and schemes needed written confirmation from a qualified actuary to confirm compliance.
In practical terms, if any changes were made to a scheme’s rules that affected members’ pension rights, specifically their “section 9(2B) rights” (i.e. rights to the payment of pensions and accrued rights to pensions), the trustees had to obtain what is known as a ‘Section 37 certificate’ or written confirmation from an actuary. This requirement is set out in Section 37 of the Pension Schemes Act 1993 and Section 42 of the Occupational Pension Schemes (Contracting Out) Regulations 1996.
Judgments from the High Court and Court of Appeal have made it clear that any amendments made between 6 April 1997 and 6 April 2016, which affected section 9(2B) rights and were made without the necessary Section 37 certificate or actuarial confirmation, are considered void. This ruling applies to changes impacting both past and future service benefits.
An additional point to note is that contracted-out schemes were required to carry out a recertification process every three years to retain their contracted-out status. The courts were not asked to consider whether the recertification process would be enough to overcome the issue of no section 37 certificate, or written actuarial confirmation, being obtained at the time of any relevant amendment to a scheme’s provisions (i.e. could the amendment become valid at the time of recertification). This certainly adds to the complexity of the rulings and will be a point that trustees of affected schemes will aim to seek confirmation on.
Overall, the implication of the Virgin Media case is that any deeds requiring written actuarial confirmation may now be void, and this could have a domino effect on subsequent deeds based on the voidable deed. This situation creates a significant challenge for trustees and sponsoring employers, as their entire benefit structure might be incorrect. Both trustees and sponsoring employers of affected schemes are likely to need to seek further clarification on how this judgment will have an impact on their specific scheme.
Q: OK, that will be a relief to those lucky enough to be involved with a scheme that was not contracted out. For the rest of us, with the case having now been through the High Court and the Court of Appeal, does that mean we now have a definitive position to work with or is there a chance of further appeals or other action that could change the current position?
A: While it’s unlikely that there will be any further appeal to the Supreme Court, the situation is still evolving. The Association of Consulting Actuaries, the Association of Pension Lawyers and the Society of Pension Professionals have formed a working group to ask the Department for Work and Pensions (DWP) to step in. They’ve specifically requested that the DWP consider making a suitable regulation under Section 37(2) of the Pension Schemes Act 1993, which would “remove this uncertainty by validating retrospectively any amendment that is held to be void solely because a written actuarial confirmation was not received before the amendment was made or where such a confirmation cannot now be located”.
Section 37(2) of the Pension Schemes Act 1993 provides the power for the DWP to introduce any regulation which would “operate to validate with retrospective effect any alteration of the rules which would otherwise be void under this section”.
As at 29 July 2024, the working group stated that “the DWP has not indicated what, if any, resolution to the issue it may take”.
However, given the significant impact this issue could have on a large number of schemes across the UK, and the ongoing pressure from industry professionals, there is hope that the DWP will take some form of action.
Q: It sounds like we’re not quite done yet. Thinking about the so-called section 37 certificate, it seems that there was no specified format for what this should look like. How do we know what counts as appropriate certification and who decides whether it meets the statutory requirements?
A: You’re right, David. The legislation doesn’t specify what the section 37 confirmation should look like. It simply requires the scheme actuary to confirm statutory compliance to the trustees in writing. Interestingly, the courts didn’t delve into this detail either, which leaves some room for interpretation.
Some people see this as the courts intentionally leaving a bit of ‘wiggle room’ in how the ruling can be applied practically. However, for others, this adds another layer of complexity. It’s still uncertain whether the Courts will be asked to consider different forms of evidence for these actuarial confirmations, such as emails, trustee meeting minutes, or other documentation, as valid.
Q: If we believe certification (or written confirmation) was obtained at the time but we can’t find evidence of it for a particular deed, is it an option to ask the scheme actuary to certify the amendments retrospectively?
A: Currently, that’s not an option. However, depending on future actions by the DWP, it could become a possibility. We’ll have to wait and see how the situation develops.
Q: OK, we’ll have to hope something comes through soon. In the meantime, what initial steps, if any, should schemes be taking to assess the potential impact?
A: The first question to consider is whether to investigate the issue at all. While this might seem like unusual advice, it’s important to remember the old saying: don’t ask a question if you’re not ready for the answer. Given the current uncertainty, it’s wise to consult your legal adviser about whether it’s necessary to delve into this issue right now. In some cases, it may be more practical to adopt a “wait and see” approach, whilst the DWP considers this. However, if you’re in the process of buying-in, buying out, or winding up your pension scheme, waiting might not be an option. Your legal adviser can provide tailored guidance based on your specific situation.
As a starting point, trustees should review their historical scheme documentation to check if the necessary actuarial confirmations were obtained. Particular attention should be given to any deeds that introduced a reduction or change to members’ benefits, as this could indicate that the scheme reference test was no longer met, or if an actuarial confirmation was even required to validate the changes.
We’ve already conducted reviews for clients who believe their schemes might be affected by the ruling. This has involved advising trustees on which documents need further examination, depending on the specific changes made by the deed.
So far, our reviews have revealed a range of scenarios, from official Section 37 certificates attached to deeds, to cases where there’s no certificate, but some wording that suggests the actuary was consulted. Often, this wording appears in the recitals within the deed, but in some instances, there’s neither a certificate nor any indication that the necessary confirmation was considered.
Where no official certificate is present, but there’s wording (for example, in the recitals) that might imply the required confirmation was considered, your adviser will need to assess whether this is sufficient for a Section 37 confirmation. This assessment can vary from scheme to scheme and adviser to adviser, so seeking professional advice is essential.
Q: Thanks, Loren. We know that a number of schemes are actively working towards bulk annuity purchase in the next year or two. What should they be doing?
A: The situation is obviously time critical and a view and awareness of the risk of defective deeds needs to be addressed urgently. Furthermore, trustees have to provide warranties when they enter into a bulk annuity contract and by not considering the position they may be in breach of these. In addition, the sponsoring employer will need to consider any potential extra liabilities. This is an area where your legal adviser will be able to explain the merits of any actions and you should seek urgent advice on the position.
Q: To complete the picture, what about schemes that have recently been wound up? Is there a need to revisit the scheme documents or are they now in the clear?
A: Neither of the recent judgments addressed this specific situation. However, our view is that once a scheme is wound up, the trust is dissolved, meaning the former trustees are not obligated to revisit or review these issues. Additionally, we believe that claims from former members of the scheme are likely to be rare.
That said, former trustees who obtained trustee insurance as part of the wind-up should take a moment to review their policy details to ensure they are still covered. It’s a precaution worth considering to avoid any unexpected surprises.
Q: OK, so it seems that all schemes which are or were in scope may have to do a little bit of work on this to assess the need for any further action. Can you sum up the position with some brief thoughts on what action is required and by when, and maybe comment on the implications of taking no action?
A: We recommend that trustees contact their professional advisers as soon as possible to determine how best to address the potential impact of the ruling on their scheme, if any.
While taking no immediate action might seem like a reasonable approach until more clarity is available, it does carry risks. Trustees could face legal challenges from scheme members or even regulatory action from the Pensions Regulator for not complying with legal requirements. We believe that this is unlikely at present but may be an issue in the future. Your legal adviser can help you navigate these risks and decide the best course of action.
We’re closely monitoring developments, especially to see whether the DWP will step in with a regulation under Section 37(2) to mitigate the ruling’s impact. Let’s plan to catch up again in a few months, David, to review any new developments and discuss how they might affect the schemes in question.
Thanks Loren. That’s been a really interesting discussion, and I will be sure to take up your offer of a further update in a few months’ time.
To discuss the potential impact on your scheme, please contact:
| David Hodgson | Loren Ward |
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| 01423 229 029 | 0191 432 5324 |
| david.hodgson@sandccarsalesharrogate.co.uk | l.ward@neonlegal.com |
| www.mhmpensions.co.uk | www.neonlegal.com |