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This case (Virgin Media Ltd -v- NTL Pension Trustees II Ltd & Ors [2024] EWCA Civ 843) will be of particular interest to trustees (and members) and employers of defined benefit pension schemes that were contracted-out between April 1997 and 2016 (when contracting-out was abolished).
What are section 9(2B) rights?
Prior to 6 April 2016 pension scheme members employment could be contracted-out of the earning related part of the state pension scheme so that the contracted-out employees did not accrue the additional part of the state pension on the basis that they and their employer paid lower National Insurance contributions and in return employers were required to provide a minimum level of pension. Before 6 April 1997 contracted-out schemes were required to provide a "guaranteed minimum pension" or "GMP" which roughly equalled the state pension. To address inherent equality issues within the GMP, from 6 April 1997 this was changed to a requirement to provide pensions for members and spouses or civil partners which were at least broadly equivalent to those set out in a reference scheme test ("RST") defined in the legislation. The rights to these benefits are known as "section 9(2B) rights" after the section in the Pension Scheme Act 1993 that set them out.
A scheme's pensions would not be treated as satisfying the RST unless the scheme's actuary certified that that they were broadly equivalent to the RST. These requirements were set out in section 37 of the Pension Schemes Act 1993 and regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996. This legislation also provided the rules of a contracted-out scheme could not be altered in relation to any section 9(2B) rights unless the scheme's actuary was notified of the change and confirmed to the trustees in writing that the scheme would continue to satisfy the RST if the alterations were made. The certification is commonly known as a "section 37 certificate", although technically all that is required is written confirmation and no set form of certificate is required. The Virgin Media case concerned the validity of an amendment to section 9(2B) rights where no confirmation from an actuary was obtained.
High Court decision
The Court of Appeal judgment of 25 July 2024 was an appeal by Virgin Media, the employer of the relevant pension scheme. Virgin Media appealed the second of three matters previously determined by the High Court (Virgin Media -v- NTL Pension Trustees II [2023] EWHC 1441 (Ch)). The issues considered by the High Court were:
- Whether the failure to obtain actuarial confirmation rendered
the amendments void to any extent. The judge in the High Court
ruled that without the actuarial confirmation any amendment in
respect of section 9(2B) rights was invalid and void.
- Whether the definition of section 9(2B) rights as used in the
legislation imposing the requirement for the actuarial confirmation
referred to both past service rights accrued before the date of the
amendment and rights accrued on and after that date and therefore
whether actuarial confirmation was required for both periods or
just for benefits accrued before the date of the amendment. This
was the subject of the appeal.
- Whether the requirement for actuarial confirmation only had an effect in relation to adverse amendments to section 9(2B) rights. The judge in the High Court ruled that in the absence of the actuarial confirmation all amendments that affected section 9(2B) rights would be void, not just the adverse amendments.
Anything changed from the appeal?
On the second point above brought before it, the Court of Appeal agreed with the decision of the judge in the High Court therefore the current legal position remains as set out in the three points above, however it does not mean that all issues have been resolved or that all amendments that were not initially made with the requisite actual confirmation will be necessarily void as explained below.
The Virgin Media case itself concerned a rule amendment made in 1999 that reduced the revaluation rate for deferred pensions in respect of benefits accrued after the amendment was made. Virgin Media argued that some amendments made to the legislation over the years supported a construction that actuarial confirmation was only necessary for benefits accrued up to the date of an amendment. In addition, the relevant legislation defined section 9(2B) rights by reference to "accrued rights to pensions" which they contended only referred to benefits accrued up to the date of the amendment. Although the judge giving the leading judgment (Nugee LJ) thought it was not difficult to see why leading counsel for Virgin Media had submitted that the natural meaning of that expression was rights to future pensions already earned by past service to date, he thought it was "a good illustration of the danger of approaching a question of statutory construction by starting with giving words their natural meaning before orientating oneself by reference to the legislative purpose and scheme". After considering the context and objective of the legislation the judge concluded "the definition is not limited to pension rights that have already been earned by service to date at the date of the proposed alteration but can naturally include rights to pension benefits that a member could continue to earn". He also said that had he needed to (because he hadn't reached his decision), he would have applied the introductory words "unless the context otherwise requires" to the definition of section 9(2B) rights so that it related to benefits accrued before and after the date of an amendment.
What next?
There is a possibility that this matter could be appealed to the Supreme Court but that is probably unlikely. The matter is not, however, completely settled as Nugee LJ added a footnote saying there was a possible argument that amendments might become valid when the actuary next re-certifies the scheme. He noted that this was not argued in the High Court or the Court of Appeal but was reserved for future argument if necessary. If amendments that were invalid because the trustees did not obtain actuarial certification could be validated by a later actuarial certification, many such amendments would be validated because actuarial recertification was required every three years. There is some uncertainty therefore whether a later actuarial confirmation can have retrospective effect to validate an amendment made before the date of the confirmation.
Further, section 37 of Pension Schemes Act 1993 allows regulations to be made to validate otherwise void amendments with retrospective effect, therefore the Government could if it so decided implement regulations to confirm that actuarial confirmations can be retrospective. A joint working group of the Association of Consulting Actuaries, the Association of Pension Lawyers and the Society of Pension Professionals has been in contact with the Department of Work and Pensions and proposed that the Secretary of State should remove the uncertainty by validating retrospectively any amendments that are held to be void solely because a written actuarial confirmation was not received before they were made (or where such a confirmation cannot now be located). There has, however, been no indication to date that it will do so.
Assessing the risk
Uncertainties remain especially over whether later actuarial confirmations can retrospectively validate amendments, although it will be possible to assess the risk of Virgin Media issues affecting a pension scheme. The following could be considered:
- Was the scheme contracted-out between 6 April 1997 and 6 April 2016? If not, no amendments will be invalidated by Virgin Media.
- Do the amendments affect section 9(2B) rights? If they don't, the amendments will not be invalidated by Virgin Media. The amendments could be to benefits that are not part of section 9(2B) rights, such as benefits for beneficiaries other than spouses or civil partners (e.g children) or affect unrelated administrative matters or powers.
- Do the amendments improve section 9(2B) rights? If they do, the
amendments (if made before 6 April 2013*) could still be invalid
but it may be possible to remedy them by a later amendment to
confirm the earlier amendment and increase benefits insofar as the
earlier alteration is invalid. The amendments would then be
amendments of benefits accrued in respect of past service rather
than benefits accrued in respect of future service. The
requirements of regulation 17 of the Occupational Pension Schemes
(Schemes that were Contracted-out) (No 2) Regulations 2015, which
do allow for benefit improvements, would have to be complied
with.
*Regulation 42 was amended with effect from 6 April 2013 to remove the actuarial confirmation requirement in respect of benefits that had accrued up to the date of the amendment but requires that rights to section 9(2B) rights are preserved or that protections set out in section 67 of the Pensions Act 1995 are observed.
Current position
Although there is some possibility of an appeal, it seems likely that the settled position will be that amendments by a contracted-out scheme made between 6 April 1997 and 6 April 2016 will be invalid without the necessary actuarial confirmation insofar as it affects section 9(2B) rights in respect of benefits accrued in respect of service before and on and after the date of the amendments. Amendments that were made on or after 6 April 2013 may by valid in respect of benefits accrued before the date of the amendment if they did not adversely affect the benefits or preserved the section 9(2B) rights. It may be possible to validate amendments made before 6 April 2013 that did not reduce or prejudice benefits or protected section 9(2B) rights by a further amendment.
It is not certain whether an actuarial confirmation provided after the date of the amendment can validate an amendment. There is a suggestion in the Virgin Media case that this may be the subject of further proceedings. The government also has powers to make regulations to provide for the retrospective validation of amendments but at present, although the issue has been raised with the Department of Work and Pensions, we are not aware of any indication that the Secretary of State will do so.
Trustees could carry out an assessment of the risk that Virgin Media affects their scheme and may be able to dismiss that possibility or narrow the extent of that risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.