Section 37 case a decision point for trustees and sponsors


Case Recap

Virgin Media Limited was the principal employer of the National Transcommunications Limited Pensions Plan (the Plan), a contracted-out DB scheme.

From 1997, contracted-out schemes had to satisfy the Reference Scheme Test (RST). Section 37 of Pension Scheme Act 1993 required that Scheme Rules cannot be altered unless the Trustees informed the scheme actuary in writing of the proposed alteration and the actuary confirmed in writing that the scheme would continue to satisfy the RST.

The Plan executed a deed in 1999 reducing the rate of revaluation but the relevant confirmation from the Scheme Actuary could not be located. If the changes in the deed were deemed invalid, then this would increase the liabilities of the Plan by £10m. The High Court considered the case and ruled the legislative requirement had not been met.

Wider implications

Many contracted out schemes may be unable to find actuarial confirmation for one or more of their historic deeds. This may be because it was not provided, or simply cannot be located within old files.

Based on the ruling, these deeds might be considered invalid (depending on the detail and content of the deeds) and Trustees could be failing to provide the required benefits under their scheme as a result.  Changes to pension increases, accrual rates, or retirement ages would be of particular concern.

The Appeal

The Court of Appeal heard the case last week and industry experts were split as to how this might go.

It is unclear when the judgment will be published but this may be early Autumn. It is also not currently clear to what extent the appeal ruling will focus on specific details or give a comprehensive ruling that clarifies the position for all schemes moving forward.

Impact of outcomes

If the High Court judgment is overturned?

In this case the pre-June 2023 situation is restored and the issue potentially disappears. However, the outcome will depend on the nature of the appeal and the precise wording of the ruling. Schemes might want to ensure paperwork is in order so that this question does not arise again.

If the High Court judgment is upheld?

This could have far-reaching consequences for many pension schemes, with deeds being confirmed as (potentially) ‘invalid’. Schemes will be searching archive records for sufficiently persuasive evidence that the process was followed. Otherwise, original benefits might need to be reinstated for a period, depending on the execution of subsequent deeds.  All cases will need to be assessed on their individual merits.

Might the Government step in?

We understand that the DWP could in theory draft retrospective legislation to help resolve this – e.g. by allowing the current Scheme Actuary to certify the “invalid” deed (if they can, given available data etc.).  However, if how or when this could happen is highly uncertain.

What are schemes currently doing?

Some schemes have taken initial steps to look at past deeds to see the potential extent of the problem, but many have not in the hope of a positive resolution. Some company auditors are starting to query potential exposure, and this should also be a consideration for any Trustees reviewing their funding strategy and/or valuation results.

Schemes who have purchased (or are purchasing) buy-ins may find their liabilities are no longer perfectly matched by the policy. If new scheme benefits emerge that have not been secured within the insurance contract, this will need to be resolved (and any additional costs met) before moving to buy-out.

What should schemes be doing?

Whilst we have sympathy with the general preference for a ‘wait and see’ approach, there are potential downsides. We recommend all Trustees consider their position and/or seek views from their scheme lawyers before actively deciding how to proceed, noting the potential for a conflict of interest if the lawyers concerned were responsible for drafting the deeds whose validity is now being questioned.

Our key concerns are:

  1. The direction of the case remains unclear. However much we might disagree and/or have concerns as to the original ruling’s ramifications, that is the current legal position. We can await the outcome of the appeal court, but should be prepared for a negative outcome and we have no certainty regarding possible government intervention. Important decisions around funding and investment strategy that are being made in the meantime (including, but not limited to, potential buy-in transactions) will potentially be affected and should be made from an informed position.
  1. If there was fault for the failure to properly execute a deed then Trustees or sponsors may hope to mitigate the additional financial costs through legal action. However, we understand limitation periods could prevent claims against relevant parties. In particular, a 15 year longstop on claims could prevent claims against deeds executed before June 2009 and the clock is ticking on this and other limitation rules. Actions such as standstill agreements in order to preserve potential claims could have merits in some circumstances.

At this stage we still consider it would be premature to recommend schemes amend members’ benefits and go through expensive rectification exercises. However, we do foresee this being necessary in a number of cases if the current position is not overturned and the DWP does not provide a practical solution.

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