On 16 June 2023, the High Court made a significant ruling in Virgin Media Ltd v. NTL Pension Trustees II Ltd and others [2023] EWHC 1441 (Ch) regarding the validity of amendments to post 6 April 1997 benefits in formerly contracted-out salary-related pension schemes. The court stated that a lack of actuarial confirmation would render those amendments void. This decision has raised uncertainty for pension schemes which were formerly contracted-out on a salary-related basis between 1997 and 2016 where there were benefit changes which were made without obtaining actuarial confirmation. In this article, we consider the potentially far-reaching implications of this case for employers and trustees.

Legislative background

From 6 April 1997 onwards, significant changes were made to the regime that allowed pension schemes to opt out of the state earnings related pension scheme (SERPS). Before this date, a contracted-out salary-related (i.e. defined benefit) scheme had to give members a guaranteed minimum pension (GMP) that was roughly equivalent to the SERPS pension it replaced. However, starting from 6 April 1997, the additional accrual of the GMP ceased, and contracted-out schemes had to meet a more general quality test called the "reference scheme test". The scheme actuary had to confirm whether the test was satisfied.

To accommodate the changes in the contracting-out regime, amendments were made to the Pension Schemes Act 1993 (PSA 1993). Specifically, Section 37 of the PSA 1993 and Regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996 (the Contracting-out Regulations) outlined that the rules of a salary-related contracted-out scheme could not be changed in relation to any Section 9(2B) rights (under the PSA 1993) unless the following conditions were met:

• the trustees informed the scheme actuary in writing about the proposed changes;
• the actuary reviewed the proposed changes and provided written confirmation to the trustees, expressing satisfaction that the scheme would continue to meet the statutory standard; and
• the changes did not prevent the scheme from meeting the conditions outlined in Section 9(2B) of the PSA 1993.

Section 9(2B) rights referred to the entitlement to receive pensions and accrued pension rights (excluding rights from voluntary contributions) under a contracted-out scheme, specifically for an individual's service in contracted-out employment on or after 6 April 1997. The contracting-out rules were changed on 6 April 2016, resulting in the abolition of contracting out on a salary-related basis. The relevant period for the court in this case was therefore from 1997 to 2016.

Facts

The case involved the National Transcommunications Limited Pension Plan (the NTL Plan), a salary-related pension scheme that had contracted out of SERPS. The trustees of the scheme sought to amend the revaluation provisions of the NTL Plan rules in 1999, which were later revised in 2013. As discussed above, actuarial confirmation was required for rule changes concerning Section 9(2B) rights. In the case of the NTL Plan, it was later discovered that the necessary actuarial confirmation was not obtained for the amendments to the scheme rules. As a result, the court was asked to interpret the statutory provisions related to contracting out and determine the consequences of the missing actuarial confirmation.

Key issues and ruling

The court addressed three key issues in its ruling:

• Consequences of failure to provide actuarial confirmation

The court concluded that amendments to contracted-out salary-related schemes made without the actuarial confirmation required by the Contracting-out Regulations would be rendered void. Section 37 of the PSA 1993 clearly stated that non-compliant alterations could not be regarded as valid or effective.

• Past and future service

The court determined that the definition of Section 9(2B) rights, which were subject to the actuarial confirmation requirement, included both past and future service rights. The court rejected the argument that the requirement only applied to past service benefits and confirmed that it covered benefits arising from service after the amendment, specifically stating that "there is nothing" which restricts the rights to past service benefits.

• Adverse alterations

The court ruled that the voidness sanction under Section 37 of the PSA 1993 applied to all alterations to Section 9(2B) rights, not just adverse alterations. The legislation did not limit the voidness provision to changes that adversely affected the rights. The actuarial confirmation requirement applied to any alteration to ensure compliance with Section 9(2B) rights.

Implications

The High Court's ruling on this case could lead to increased benefit costs for sponsors and unexpected windfall benefits for members. The decision highlights the importance of obtaining the necessary actuarial confirmation for any amendments to benefits in formerly contracted-out schemes on a salary-related basis between 1997 and 2016. Failure to comply with this requirement may render the amendments void and have significant consequences for the affected schemes.

It is possible that amendments will have been made in good faith on the basis that it was felt that no actuarial confirmation was required, particularly with regard to benefit changes not adversely impacting Section 9(2B) rights. However, the judgment is clear that the actuarial confirmation should have been sought.

Trustees and sponsoring employers may want to wait and see if any further clarification will be made from this case before conducting a review of historic amendments and, given that there is a reasonable prospect of a successful appeal, we would advise waiting for the final outcome. The exception to this advice would be where a scheme is in the process of a buy-out, which would create a more pressing need for trustees and employers to conduct a review of the amendments.

For trustees

Trustees overseeing schemes that were previously contracted out on a salary-related basis between 1997 and 2016 may find it necessary to examine deeds of amendment from that time period in order to ascertain the following:

• whether the deed contains amendments that could potentially be influenced by this ruling; and
• whether each deed provides adequate evidence, on its face, that actuarial confirmation was indeed provided.

This may result in the need for benefit corrections and therefore legal action against advisers. However, there are likely to be limitation issues.

For sponsoring employers

If invalid benefit reductions are discovered, sponsors may face increased funding obligations due to the rise in scheme liabilities. Additionally, there will be further costs associated with the benefit correction process.

During corporate transactions, prospective buyers may raise concerns about the potential for greater scheme liabilities resulting from this judgment. However, their ability to assess this may be limited due to timing and confidentiality issues. Buyers may therefore seek some form of protection in case the scheme's liabilities exceed expectations.

For sponsors who have acquired formerly contracted-out schemes, if the scheme's liabilities turn out to be significantly higher than covered by the buy-in contract, employers will have further liabilities to fund.

Comment

The full impact of the decision is yet to be determined and it remains to be seen if the case will be appealed, or if regulatory intervention will occur to address the issue retrospectively.

Following the judgment, a further short hearing is to take place before the end of July at which the parties are expected to put forward details of further issues. Practitioners in the field will be hoping permission to appeal will be granted at that hearing so that further clarification from an appellate court might arrive sooner rather than later. In the meantime, the High Court's ruling stands, potentially resulting in substantial costs for schemes with invalid amendments to their rules due to a lack of proper actuarial confirmation.