Section 37 case fails

On 25 July 2024, the Court of Appeal upheld the High Court’s decision in relation to Virgin Media v NTL Pension Trustees II Limited that the statutory actuarial confirmation was required, and without this, alterations are void. This decision could potentially have a significant impact for other schemes where changes have been made without actuarial confirmation.

Virgin Media case

On June 2023 the Virgin Media v NTL Pension Trustees II Limited judgment confirmed that rules related to contracted-out benefits cannot be altered without the statutory actuarial confirmation having been obtained. This is required by section 37 of the Pension Schemes Act 1993 and therefore non-compliant alterations were void. The judgment impacts changes to benefits earned by members of salary-related contracted-out occupational pension schemes in respect of pensionable service made between 6 April 1997 and 5 April 2013. Members’ benefits earned in this period must be at least as good as those provided by the reference scheme test and the rules of a salary-related contracted-out scheme and could not be altered unless the actuary had confirmed to the trustees in writing that the scheme would continue to satisfy the contracting-out reference scheme test. This judgement could potentially apply to other changes. The judgment stated that this outcome would cost this scheme around £10 million.

On 25 July 2024, the Court of Appeal upheld the High Court’s decision that the statutory actuarial confirmation was required, and without this, alterations are void. The question appealed was whether a confirmation was required for changes to future service benefits or just past service benefits. The Court of Appeal upheld the High Court's decision that confirmation was required for amendments to future accruals, before legislation changes in 2013. Legislation does allow the government to make retrospective regulations to validate amendments that are void due to the absence of such written confirmation. Therefore, depending upon the outcome of any subsequent appeal to the Supreme Court, the industry may call on the government to take action. Some industry bodies have also begun lobbying government to make these changes.

Background

Until it was abolished in April 2016, pension schemes could contract out of the State schemes. In return for lower employer and employee National Insurance contributions, a scheme had to meet certain minimum requirements in relation to the benefits provided through the scheme. Before 6 April 1997 a contracted-out salary-related scheme was required to provide each member with a Guaranteed Minimum Pension. The 1995 Pensions Act ended that regime and with effect from 6 April 1997 and contracted-out schemes had to satisfy the Reference Scheme Test, which had to be assessed and certified by the scheme actuary. This case relates to the statutory position between 6 April 1997 and 5 April 2013, the legislation was changed on 6 April 2013 and again on 6 April 2016 when contracting-out was abolished.

Potential impact

Scheme actuaries may need to consider whether this needs to be taken into account in funding updates and triennial actuarial valuations at this stage. To date actuaries have not been explicitly referred to this matter in their actuarial valuations.

From a pension scheme accounting perspective, unless the possibility of settling the contingent liability is remote or it is not material disclosure should be made in the notes to the financial statements of the estimated financial effect and an indication of the uncertainties relating to the amount or timing. Trustees of pension schemes should assess whether disclosure is required in their accounts. The case may go to the Supreme Court. In addition. the government could make changes to legislation and there is already pressure from the industry for the government to do this, given it is allowed under the 1993 Act. A request has been made to the Secretary for State to make regulations that 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 cannot be located). In addition, the value of retrospective liabilities and existence of any retrospective additional liabilities is unknown as schemes have not investigated the matter given the significant uncertainty.

For the Virgin Media case it appears that the historic element may not be material to the scheme accounts. In addition, there is no indication at present that the historic elements would be material to the accounts of pension schemes in general. For these reasons, to date most schemes have not disclosed the matter in their accounts, however a few are, and Trustees should consider whether they want to or should make a disclosure in their accounts.

Employers will also need to consider the impact of the case on their accounts, and this will include retrospective and future liabilities and therefore will be a larger amount. If the amount is not included in actuarial valuations due to lack of information, there will need to be an assessment as to whether a disclosure is required.

To find out more about the matters discussed in this insight, get in touch with Shona Harvie or your usual Crowe contact.