On the 25 July 2024 the Court of Appeal upheld the decision in the Virgin Media case, which could potentially have far reaching effects for employers who sponsor defined benefit (DB) pension schemes.
The appeal in the case of Virgin Media Ltd v NTL Pension Trustees II Ltd & Ors [2024] EWCA Civ 843, followed a High Court decision in June 2023, in which it was decided that the absence of actuarial confirmation in accordance with contracting-out legislation rendered rule amendments in a contracted-out DB pension scheme void. Permission was granted to Virgin Media to appeal the decision, which has now been upheld by the Court of Appeal.
The Law
Prior to 6 April 1997 DB pension schemes were able to opt-out, often referred to as 'contract-out', of the State Earnings Related Pension Scheme (SERPs). This was on the basis that the pension scheme provided a Guaranteed Minimum Pension (GMP), which was roughly equivalent to the SERPs pension it replaced. Contracting-out enabled scheme members and the sponsoring employer to pay reduced National Insurance Contributions, so many DB pension schemes were contracted-out before it was abolished in 2016.
From 6 April 1997 GMPs ceased and DB pension schemes had to meet a more general quality test called the “reference scheme test” if they wanted to contract-out of the State Second Pension (which replaced SERPs). Under the contracting-out legislation the scheme actuary had to confirm the test was satisfied.
Contracted-out rights became known as 'section 92B rights', which is a reference to the section in the legislation that set out the requirements for contracting-out.
Section 37(1) of the Pension Schemes Act 1993 set out how alteration could be made to a contracted-out pension scheme. It provided at the time that, except in "prescribed circumstances", the rules of a contracted-out scheme could not be altered unless the alteration was of a "prescribed description” i.e. the rule amendment had to meet certain requirements as set out in regulations.
Regulation 42 of the Occupational Pension Scheme (Contracting-out) Regulations 1996 set out the “prescribed circumstances” and the “prescribed description”. Regulation 42(2) provided that the rules of a contracted-out DB pension scheme could not be altered in relation to any section 9(2B) rights unless the following conditions were met:
- The trustees of the scheme have informed the actuary in writing of the proposed alteration
- The actuary has considered the proposed alteration and confirmed to the trustees in writing that he is satisfied that the scheme would continue to meet the statutory standard (i.e. the reference scheme test); and
- The alteration does not otherwise prevent the scheme from satisfying the conditions of section 9(2B)
The Virgin Media case was about whether Section 37 and Regulation 42 had been complied with in relation to amendments made to the scheme
The Facts
The National Transcommunications Limited Pension Plan (NTL Plan) was a contracted-out DB pension scheme.
By a trust deed and rules dated 8 March 1999 the trustees of the scheme sought to amend the revaluation provisions i.e. the amount by which a deferred pension increases between the date the member leaves pensionable service and the date the member commences to receive their pension under the scheme rules. The amendment did not adversely affect any benefits that had already been earnt. However, the parties could not find any evidence that the NTL Plan actuary had confirmed that amendments would continue to meet the reference scheme test.
Under a Third Definitive Deed and Rules dated 21 June 2010, the NTL Plan was closed to new members. Appended to the deed was the required actuarial certificate. Therefore, the case considered the validity of the changes made to the revaluation rate in relation to scheme members with pensionable service between 8 March 1999 and 21 June 2010.
The High Court decision
The High Court held in Virgin Media v NTL Pension Trustees [2023] EWHC 1441 that amendments made to contracted-out DB pension schemes without the actuarial confirmation required by Regulation 42 are void. That meant that amendments which affected both past and future service benefits were void even where such amendments were beneficial to members.
The Court of Appeal decision
Virgin Media appealed, asking the Court of Appeal to consider whether the legislative conditions for amendments related to both past and future service or to past service only. No appeal was made on the question of whether the absence of the required actuarial confirmation was sufficient to render an amendment void.
The Court of Appeal upheld the decision of the High Court, confirming that the conditions required for a valid amendment related both to past and future service.
What does this mean for sponsoring employers and scheme trustees?
The pensions industry has responded to the decision by urging the DWP to intervene and use its power to validate amendments retrospectively as it has done before. We shall have to wait and see whether or not the DWP is prepared to intervene.
It is not yet known whether Virgin Media will appeal to the Supreme Court.
The decision itself is not surprising, but if the decision stands and the DWP does not intervene, then the really important question will be what evidence is sufficient to demonstrate that a compliant actuarial confirmation was, in fact, provided? This question was not considered in the Virgin Media case and the legislation is not prescriptive, other than the actuarial confirmation has to be in writing. Therefore, there is still considerable uncertainty. Sponsoring employers and scheme trustees should consider obtaining legal advice where it is not clear whether actuarial confirmation was obtained in relation to a formerly contracted-out DB pension scheme where rule amendments were made between 1997 and 2016.
