On 5 June, the Department for Work and Pensions announced plans to introduce legislation which would seek to address the issues and industry concerns that have arisen following the Court of Appeal decision in Virgin Media v NTL Pension Trustees.
We have discussed the Virgin Media case in a previous blog post, which you can read here. The case centered around the statutory requirements for contracted-out pension scheme benefits. Historically, pension schemes could contract-out their members from part of the state pension but had to provide their members with a minimum level of pension benefits (for DB schemes after 1996 known as Section 9(2B) rights). Section 37 of the Pension Schemes Act 1993 prohibited amendments to scheme rules that would affect Section 9(2B) rights unless the trustees had obtained actuarial advice that the proposed amendments met the requirements (a Section 37 confirmation).
The question in the Virgin Media case was whether changes made to a trust deed and rules could be valid and effective in the absence of a Section 37 confirmation. The Court of Appeal held that the wording of Section 37 is clear – all changes made to scheme rules that affect contracted out rights, whether adverse or not, require actuarial confirmation in order to be valid. This decision caused some concern in the pensions industry: at best it could impose an administrative burden on schemes to verify that they obtained Section 37 confirmations for changes to scheme rules over a long period, and at worst might mean that schemes have been providing incorrect benefits, with implications for funding and the need to rectify past payments of benefits.
Since the Court of Appeal’s judgment there has been significant industry engagement with the Government and DWP regarding the uncertainty created by the decision. The DWP has acknowledged these concerns and stated that the Government recognises that greater clarity is needed in this area and plans to legislate to provide this.
According to the announcement, the legislation will give schemes the opportunity to obtain retrospective actuarial confirmation that the changes made to scheme rules that affect Section 9(2B) rights meet regulatory standards. There is no indication as yet about any procedural steps and safeguards that might be included. The announcement did note, however, that all other scheme obligations will be unaffected. We await the details. It is possible for example that the legislation might require any corrective action to be taken within a specific window of time (or equally that the remedy period could be open ended).
We do not yet have any indication of when this legislation might be brought in. There is an existing power under section 37 to make regulations which operate so as to validate with retrospective effect any alteration of the rules which would otherwise be void- if the Government decide to rely on this (rather than for example amending the Pension Schemes Bill currently before Parliament) we might see the provisions in force by the end of the year.
This will be very welcome to many schemes. It does seem that any schemes which have not yet audited their historic scheme records to ascertain if there are in fact any issues can leave this until the detail of the remedy process emerges. For schemes which are aware of a possible issue and undertaking a transaction of some kind such as a buy out, this provides some reassurance, but may impact the timing of their transaction.
If you would like to discuss in further detail any of the points raised in this blog post, please contact your usual Freshfields contact.
