It's already old news that at the end of July the Court of Appeal dismissed the appeal in the Virgin Media pensions case. You could certainly be forgiven for thinking that as the issues in this case have narrowed, so too have the prospects of a satisfactory outcome.
However, this isn't quite the full story, so as the dust perhaps begins to settle for Virgin Media themselves, we ask – where does that leave everyone else?
High Court and Court of Appeal proceedings
The conditions for defined benefit contracting-out from 6 April 1997 to 6 April 2016 included a requirement (under section 37 of the Pension Schemes Act 1993) for actuarial confirmation that the scheme would still pass the "reference scheme test" for quality after any change affecting any defined benefit pension earned by contracted-out service in the scheme (referred to officially as "section 9(2B) rights").
From 6 April 2013 the scope of this requirement was narrowed to cover only future service benefit changes, but the concern raised by the trustee and employer of the Virgin Media scheme was an older one. They could find no actuarial confirmation for a change made in 1999 affecting both past and future service benefits. To find out just exactly what this meant for them, they took three specific issues to the High Court:
- issue 1 to what extent (if any) would section 37 simply void any amendment to section 9(2B) rights that was made without prior written actuarial confirmation?
- issue 2 were "section 9(2B) rights" so defined (before 6 April 2013) as to restrict any such issue to past service rights or did they also include future benefits?
- issue 3 did section 37 affect only adverse alterations to section 9(2B) rights, or all alterations?
Genuine differences of opinion have existed for some years in all the professions as to precisely what was required by section 37, but the combination of answers given will have been unfortunate for many schemes.
On the first issue, the High Court held that where there was a statutory requirement for an actuarial confirmation and the scheme had failed to get one before making the change, the amendment was entirely void. On the second, it said this outcome applied to any changes both to past service rights and to future service rights. And on the third, it said that adverse and advantageous changes were equally affected.
Virgin Media's appeal to the Court of Appeal was eagerly awaited, but the arguments were narrowed until the judgment ultimately concerned only the second issue, of whether before 6 April 2013 an actuarial confirmation was needed for a change to future service section 9(2B) rights. After considering statutory interpretation, the historical context of the contracting-out legislation and the change to the legislation in 2013, the Court of Appeal unanimously dismissed the appeal.
Immediate Aftermath of the Appeal
Virgin Media is not now expected to appeal the decision further to the Supreme Court, but rumours persist that other cases may be brought before the High Court to try to clarify some of the more difficult questions raised by the Virgin Media case.
Requests across the industry have been made to the DWP for retrospective correcting regulations, and we understand that this is under active consideration. It seems likely too that there will in due course be guidance from the Pensions Regulator and/or the Pension Protection Fund on dealing with the outcome of the case.
Practical Next Steps
The general consensus amongst pension lawyers is that in principle it is still legitimate for trustees to continue to "wait-and-see" what happens next, in the absence of a specific concern. But in practice, this is a luxury that many trustees will not have when faced with specific questions in corporate or scheme audits, a corporate transaction, an actuarial valuation, or a proposed or immediate buy-in or buy-out transaction.
Therefore, some clients may already wish to instruct a review of their historical amendments, often just at a high level for now, to understand what challenges may lie ahead. Every amendment potentially has its own special features, but in summary the main points to note about an initial legal review of this sort are that:
- Prior actuarial confirmation was potentially required for any amendment between 6 April 1997 and 5 April 2016 which affected defined benefit rights in a contracted-out scheme or section.
- Any such actuarial confirmation must be in writing, but while many took the form of signed certificates, a sentence or two in a letter or email might often work equally well.
- Many scheme amending deeds state near the beginning that the actuary has previously provided such a confirmation, which can usually be considered sufficient evidence in itself that this was done.
- There are often mitigating factors or more detailed arguments that could make a difference, so deeper legal consideration of any apparently troublesome amendment would often then be recommended.