Virgin Media Court of Appeal decision - Q&As

We do not yet know.  But there are some indications that Virgin Media is not seeking to appeal further.

If Virgin Media wished to appeal, it first needs to seek permission.  The Supreme Court would then consider whether or not to accept the appeal, with no deadline.  It might accept it, on the basis that it is a case of very considerable importance.  Or it might decline, in the knowledge that the Court of Appeal bench included very experienced pensions specialist judges whose judgments can be accepted.  But it would carefully consider the merits and we simply do not know.

Section 37 of the Pension Schemes Act 1993 expressly allows the Secretary of State for Work and Pensions to make regulations "so as to validate with retrospective effect any alteration of the rules which would otherwise be void under this section".

The Government did not intervene after the High Court judgment, presumably because the Court of Appeal might have resolved the matter.  We therefore would not expect intervention while any further appeal is possible or ongoing.  But an industry group that has been engaging with the Department for Work and Pensions on the implications of the case has put forward proposals as to how the difficulties could be resolved by regulations.

Neither the High Court nor the Court of Appeal judgment give any clues to this. 

But we think it is strongly arguable that an amendment to close a scheme to future accrual is not within section 37 because that is not an amendment in relation to future section 9(2B) rights: the whole point of the amendment is that for future service there are no section 9(2B) rights.

A confirmation would, however, have been required in respect of past service rights at least if the final salary link was being ended.

The High Court held that its decision applies to these kinds of amendment too.  This point was not appealed, so it stands and can only be overturned by the Court of Appeal in another case.

In some cases, there could be a setting off of invalid favourable amendments against invalid adverse amendments.

No.  The legislation said that the rules could not be altered in relation to contracted-out rights unless the trustees have (past tense) informed the actuary in writing and the actuary has considered and has confirmed (again, past tenses).

There is a good argument that there is no duty on trustees to check whether or not actuarial confirmations were given for historic benefit rule amendments. 

Increasing external pressures in light of the Court of Appeal's decision are, however, likely to mean that in practice trustees should check.  For example, trustees may be asked about this by auditors and it is very likely to arise as a question in a buy-in/out exercise or scheme merger, or if there is a corporate transaction affecting the scheme. 

In all those circumstances, trustees of ongoing schemes might need to make the checks in very short order.  And it would be better to understand now whether or not there is any issue.  We therefore think it is advisable to start that work as soon as practicable.  Different considerations could apply if the scheme is in winding-up, depending on how far along the scheme is in its journey.  Also, if the scheme is bought-in with an insurer, the annuity contract might prohibit the trustees from investigating further.  Please ask your usual Travers Smith contact if you would like to discuss these questions.

The following considerations may be helpful when undertaking checks for actuarial confirmations:

• The confirmations were only required for amendments affecting defined benefit contracted-out rights that were made between 6 April 1997 (when the 'reference scheme test' regime began) and 5 April 2016 (when contracting-out was abolished).
  
  
• For amendments made between 6 April 2013 and 5 April 2016, the confirmation only needed to address future service benefits, not past service benefits, so the form of wording might be different.
  
  
• The confirmation did not need to be in the form of a certificate but it did need to be in writing.  That could include an appropriately worded letter or email.
  
  
• There was no need for the confirmation to be appended to the deed of amendment or even retained.
  
  
• If a deed recital (or even correspondence) says that the actuary has given the confirmation then that should be enough to show that the requirement has been satisfied, assuming of course that there is no evidence to the contrary.

Not necessarily. 

The deed of amendment that was the subject of the Virgin Media case was a deed which effectively reduced future service benefits (by reducing the basis on which revaluation increases were calculated). If the deed was ineffective to make this change, then the higher rate of revaluation would effectively continue until the change was validly made resulting in an increase in scheme liabilities.

As set out in questions 1 and 2, there may be further judicial or legislative intervention in any event that might be relevant when assessing the validity of changes made by deeds without relevant confirmations. So, even for deeds that are similar to that considered in Virgin Media (i.e. a deed purporting to reduce the basis on which benefits should accrue), such interventions may address any issues arising.

However, even without such interventions, there will be many deeds where the type of change effected by the deed means a section 37 confirmation would not have been required.  After 6 April 2013, the regulations were revised to make it much clearer that changes to future service rights required an actuarial confirmation.  It is in relation to the period between 6 April 1997 and 5 April 2013 where the position was less clear (and it is the requirements applicable in this period that were considered in the Virgin Media case).  During this period, the requirement to obtain a confirmation applied to any changes there were to be made "in relation to any Section 9(2B) rights". 

"Section 9(2B) rights" were defined as "rights to the payment of pensions and accrued rights to pensions (other than rights attributable to voluntary contributions) under a scheme contracted-out by virtue of section 9(2B) of the 1993 Act that was a salary-related contracted-out scheme, so far as attributable to an earner's service in contracted-out employment." (NB This included those benefits in their entirety, not just to the extent that they satisfied the reference scheme test.)

There may be various amendments to scheme rules that would not properly be characterised as changes "in relation to Section 9(2B) rights" and would not therefore trigger the requirement to obtain an actuarial confirmation. These could, for example, include the following types of change:

• changes to the governance or administrative provisions of the scheme, which did not affect the accrual of pension benefits (this may include, for example, amendments to introduce an express power to enter into certain apportionment arrangements; amendments in relation to investment powers; amendments in relation to trustee indemnification and protection provisions, etc.);
• changes to lump sum benefits payable on death under the scheme or the distribution of these;
• changes to the way in which voluntary contributions were paid (which could include money purchase contributions which were not mandatory for members) or the benefits paid from them; and
• changes made to benefits sections of the scheme which were not contracted-out.

For changes made on or after 6 April 2013, an actuarial confirmation was required for any changes to a member's "rights"  accruing under a scheme attributable to service in contracted-out employment (other than rights attributable to voluntary contributions).  Different considerations may therefore apply to whether a confirmation would be needed.  

For some other deeds, if the changes could be retrospectively effected today, then again the failure to obtain a confirmation at the time the deed was executed is unlikely to result in any adverse impact for the scheme. Such changes might include, for example:

• changes which increased (or did not reduce) benefits; 
• changes giving effect to revised statutory requirements, such as changes to provisions applicable to the accrual of benefits during different types of family absence); and
• changes to correct clear grammatical or other clear errors in drafting.

Where trustees and employers identify a deed for which evidence of a relevant confirmation was not obtained, but the changes made by the deed fall into one of the above two categories, then they may conclude that there is no issue for the scheme or any impact on scheme liabilities. Obviously for changes in the second category, consideration should be given as to whether there is any merit in reconfirming the effect of the relevant changes by a further deed of amendment.

Where a deed is identified for which there is evidence that no confirmation was provided, or where there is a concern this may be the case, then it may well be that further judicial or legislative intervention may address any issues arising from the Court of Appeal's confirmation of the effect of the relevant legislation as given in the Virgin Media case.

However, trustees and employers should also consider if any steps could and should be taken to preserve claims that might be made against advisers where a relevant confirmation for a problematic deed was not provided. This is because of the effect of a limitation period that could apply to such claims. Limitation periods generally run for six years from the date a cause of action arose but can extend for a long-stop period of 15 years from that date where the party who may have such a claim was unaware of the cause of action at the time. Even here, there is an additional three-year period for bringing a claim from the date the party did or should have become aware. Where limitation periods have not already expired, but may be relevant, then parties could consider entering into "standstill" agreements with the relevant adviser that effectively stops time running, whilst parties consider whether there is any claim that could be made. 

This area needs to be navigated with some care. Regulatory issues mean that legal advisers cannot advise on this area for clients where there is a risk that any such claims arising might be made against them. This can also prevent advisers giving advice on whether specific deeds of amendment are or are not problematic - although this may be something in relation to which parties are able to reach their own conclusions.