Virgin Media case: Alterations to both past and future service

Here we discuss the Court of Appeal’s ruling in the Virgin Media case which confirms that the requirement to obtain section 37 confirmation on rule alterations applies to both past and future service rights.

The Court of Appeal has unanimously dismissed the employer’s appeal of one part of the High Court’s ‘impressive’ June 2023 judgment in the Virgin Media Ltd v NTL Pension Trustees II Ltd and others case on the effect of making rule alterations to a contracted-out defined benefit (DB) pension scheme without obtaining written actuarial confirmation required under section 37 of the Pension Schemes Act 1993 (section 37 confirmation).

On 16 June 2023, the High Court determined that rule alterations made in March 1999 to the revaluation of deferred benefits for future service under a contracted-out DB pension scheme were void and ineffective because of the apparent absence of section 37 confirmation (see here for our case summary).

The High Court also concluded that:

• the reference to post 6 April 1997 contracted-out benefits (known as section 9(2B) rights) in the legislation applying to rule alterations between 6 April 1997 to 5 April 2013 (the 1997-2013 Regime) encompasses both past and future pension rights; and
• the voidness extends to all alterations to section 9(2B) rights, not just those changes that would or might adversely affect such rights.

The employer appealed that part of the High Court ruling that the section 37 1997-2013 Regime covered both past and future pension rights. The Court of Appeal’s dismissal means the impact of the judgment could be widespread because most rule alterations of member benefits relate to future service rights bringing many more amendments within scope of the section 37 requirements than would otherwise be the case.

In summary, the Court’s decision means that rule alterations made to members’ section 9(2B) rights between 6 April 1997 and 5 April 2016 without the necessary section 37 confirmation will be void. This voidness extends to both past and future service rights under the 1997-2013 Regime (future only between 6 April 2013 and 5 April 2016) and applies irrespective of whether the changes improved members’ section 9(2B) rights, were adverse or neutral. Trustees will need to consider the implications of the case for their schemes.

Section 37 regime – background

The reference scheme test

Between 6 April 1997 and 5 April 2016 when contracting-out was abolished, a contracted-out salary related pension scheme (a COSR scheme) had to meet an overall statutory standard known as the reference scheme test. It met this test by providing certain minimum levels of benefits. The actuary confirmed triennially that a scheme continued to meet the statutory standard.

Section 37 regime

The section 37 statutory regime is contained in section 37 of the Pension Schemes Act 1993 and associated regulations. It provides that the rules of a COSR scheme cannot be altered unless the alteration satisfies certain requirements. These requirements have varied over time – see further below.

Section 37 regime: 6 April 1997 and 5 April 2013 (the relevant regime in the case)

Between 6 April 1997 and 5 April 2013, section 37 and regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996 prescribed that a COSR scheme’s rules “cannot be altered in relation to any section 9(2B) rights unless…” section 37 confirmation was provided. This involved the trustees informing the scheme actuary in writing of the proposed alteration, the actuary considering it, and providing written confirmation that, if the alteration was made, the scheme would continue to satisfy the reference scheme test.

Section 37 regime: 6 April 2013 to 5 April 2016

Amendments were made to regulation 42 with effect from 6 April 2013 to require section 37 confirmation only in respect of prospective/ future rights. Other requirements applied in respect of rule alterations to accrued section 9(2B) rights, but section 37 confirmation was not needed.

Section 37 regime: 6 April 2016 onwards (Regulation 17, Occupational Pension Schemes (Schemes that were Contracted-out) (No 2) Regulations 2015)

Following the abolition of contracting-out, the section 37 regime applies in a revised way. It requires that rules may be altered in relation to section 9(2B) rights only if, following the alteration, the scheme provides benefits for the member and their surviving spouse or civil partner at least equal to reference scheme benefits. Actuarial confirmation is not required, albeit if the alteration is a detrimental modification under section 67, Pensions Act 1995, the actuarial equivalence requirements must be satisfied.

The question

The Court of Appeal said that it was clear that regulation 42 and the requirement to obtain section 37 confirmation from 6 April 2013 applied to future service – the question was whether this was also the case under the 1997-2013 Regime? The requirement to obtain section 37 confirmation then applied to alterations relating to “any section 9(2B) rights”.

The answer

As the Court put it, the answer to this question “depends on the definition of” section 9(2B) rights, which is set out in legislation and which, at the relevant time, was:

“rights to the payment of pensions and accrued rights to pensions…under a scheme contracted-out by virtue of section 9(2B) of the 1993 Act, so far as attributable to an earner’s service in contracted-out employment on or after the principal appointed day;…”. [Emphasis added]

“Rights to the payment of pensions” in the definition clearly covered existing pensioners’ rights to pensions in payment but what did “accrued rights to pensions” cover? The answer concerned one “single question of statutory construction”. The Court of Appeal agreed with the High Court that, under the 1997-2013 Regime, it includes both past and future rights relating to contracted-out employment on or after 6 April 1997.

Reasoning for decision

In reaching its decision that section 37 confirmation under the 1997-2013 Regime is required in respect of past and future service rights, the Court of Appeal relied heavily on principles of statutory interpretation and the purpose, context and policy intent of the legislation.

The Court of Appeal agreed that it was not “difficult to see” why the employer asserted that the natural meaning of “accrued rights to pensions” (in the definition of Section 9(2B) rights, upon which the decision hinged) was a reference to those rights “already earned at any particular point in time”. It said that an interpretation of “accrued rights” including both rights earned in the past and the future did “seem an unusual use of the expression”. However, adopting the ‘ordinary’ meaning of a phrase was a “good illustration of the danger” of “giving words their natural meaning” before considering “legislative purpose and scheme”.

The Court found it hard to see why the Government would have wanted to restrict the section 37 regime to past service when one of the purposes of the regime was to ensure members received their contracted-out benefits – employers and employees receiving in return for contracting-out, the benefit of paying reduced national insurance contributions. It concluded that it would not make sense if the relevant section 37 regime was restricted so that it only applied to past service benefits.

Next steps

The decision confirms the position on what has been a matter of “considerable uncertainty in the pensions industry for some time”. It has potentially significant ramifications for contracted-out DB schemes where amendments have been made without obtaining section 37 confirmation – the financial impact for the NTL scheme is estimated to be approximately £10m.

Further court proceedings: At the time of writing, we do not know whether there will be an appeal to the Supreme Court or further hearings on the case.

Possible Government intervention: We also do not know whether the Government will intervene. It has power under section 37 to introduce regulations to retrospectively validate alterations that would otherwise be void and so could use this provision to retrospectively validate amendments that would be invalid because section 37 confirmation was not obtained (but which would have been provided) or cannot be found.

A DWP working group consisting of representatives from the Association of Consulting Actuaries, the Association of Pension Lawyers and the Society of Pension Professionals has confirmed that it has been liaising with the DWP regarding the case and proposed that regulations (with suitable ‘safeguards’) be introduced.

Action taken to date: Some schemes took steps to address the implications of the ruling following the High Court decision, for example, schemes conducting a buy-in or buyout for which the issue was particularly prevalent. However, others decided to wait until the outcome of the appeal.

Potential next steps: In the interim and if they have not already done so, trustees will wish to consider what steps to take in response to the decision. This will include consideration of both historic rule amendments and potential claims against third parties where issues are identified with past amendments (there may be limitation aspects as regards such claims which will also need to be worked through). Employers will also have an interest in the case not just because of the potential implications for the scheme but in relation to accounts and financial reporting disclosure matters.

Potential issues to consider: There are numerous issues which will/ may need to be considered in respect of historic rule alterations made between 6 April 1997 and 5 April 2016 and section 37 confirmation (some of which are complex and/ or relate to matters that have not been resolved by the courts). They include the following:

• Which section 37 regime applied to the amendment being considered?
• Was section 37 confirmation required? There will be scheme alterations which do not come under the section 37 regime, for example, administrative changes such as deeds appointing and removing trustees or a change of scheme name. Although we know that certain rule alterations will not be in scope, there is still uncertainty as regards precisely which kinds of amendments are covered.
• If section 37 confirmation was required, was it obtained and did it comply with relevant requirements?

Section 37 confirmation was often provided in the form of an actuarial certificate attached to rule amendments. However, this was not always the case and written confirmation may well have been provided in another format, for example, by email. Also, it was often the case that an amending deed would not contain a certificate, but the recitals would reference that written actuarial confirmation had been provided.

The Court of Appeal has confirmed that a formal certificate was not a necessity and all that was required was written confirmation. In cases where section 37 confirmation was provided in non-certificate form, consideration will need to be given as to the format of the confirmation provided, its content and whether it is compliant.

If it is not clear whether section 37 confirmation was provided, further investigations may be required to determine the position and whether the available evidence is sufficient to demonstrate compliance. For example, was confirmation provided in an email? Would the actuary’s triennial recertification that a scheme continued to meet the statutory standard suffice to retrospectively validate an otherwise void amendment?

• The consequences of any scheme alterations made without section 37 confirmation will need to be worked through – for example, there may be potential ramifications in respect of later rule changes and/ or knock-on effects in respect of tax.
• Would it be possible to retrospectively validate an historic amendment made without requisite section 37 confirmation? For example, this might be the case where benefit improvements have been made.

It is hoped that the Government confirms its position on whether it will introduce regulations to address the implications of the case as soon as possible. In the meantime, schemes should consider (obtaining relevant assistance from their advisers) what action it would be appropriate for them to take.