High Court delivers long-awaited judgment on the impact of missing section 37 confirmations
Mrs Justice Bacon handed down her first instance decision in which she held that:
- Section 37 of the Pension Schemes Act 1993 (section 37) operates to make void any amendment to the rules of a contracted out pension scheme without written actuarial confirmation under Regulation 42(2) of the Occupational Pension Schemes (Contracting Out) Regulations 1996, in so far as that amendment relates to members’ section 9(2B) rights.
- The requirement for actuarial confirmation applied to amendments affecting both past and future service rights.
- All such amendments to section 9(2B) rights would be rendered void by the absence of the required actuarial confirmation and not just those which, if valid, would adversely affect section 9(2B) rights.
Historically, state pension provision was provided in two parts: the state pension and the additional state pension. Between 1978 and 2016 final salary occupational pension schemes were able to contract out of the additional state pension, and doing so had (in broad terms) three consequences:
- A scheme’s employer and its members would pay reduced national insurance contributions.
- Members would surrender their right to receive benefits under the additional state pens.
- The scheme would be required by law to pay members a benefit in lieu of the additional state pens.
Until 6 April 1997, the benefit contracted out schemes were required to provide in order to retain contracted-out status was known as guaranteed minimum pension (or GMP), and schemes had to be able to certify that their rules met the legal requirements for GMPs (or use GMP model rules published by the then Occupational Pensions Board).
With effect from 6 April 1997, changes to the contracting-out legislation took effect so that no further GMP would accrue. To retain their contracted-out status from that point on (and until contracting out was abolished in 2016) defined benefit pension schemes had to be able to show that they provided a right to accrue benefits that met a statutory standard, known as section 9(2B) rights (in reference to section 9(2) of the Pension Schemes Act 1993). The actuarial checks necessary to establish that the legislative requirements were met became known as the “reference scheme test”.
Amending contracted-out schemes
Section 37 only allowed the rules of contracted out schemes to be altered in prescribed circumstances. Those circumstances are dealt with in Regulation 42 of the Occupational Pension Schemes (Contracting Out) Regulations 1996 (Regulation 42).
Of particular relevance in this case is Regulation 42(2) which provided that the rules of a contracted out final salary scheme could not be altered in relation to any section 9(2B) rights unless:
- the trustees had informed the scheme actuary of the proposed alteration in writing;
- the scheme actuary had considered the proposed alteration and confirmed their satisfaction, in writing to the trustees, that the scheme would continue to satisfy the reference scheme test; and
- the alteration did not otherwise prevent the scheme from satisfying conditions of section 9(2B).
The actuary’s written confirmation is often referred to as a section 37 certificate, though it can be in a different form as long as it is in writing.
For many years, the pensions industry has faced an unanswered question: does a failure to obtain the requisite section 37 confirmation render an amendment to benefits void? Several cases have looked at the question, but the NTL case is the first one to receive judicial examination.
The NTL case
The rules of the National Transcommunications Limited Pension Plan (Plan) were amended in 1999 under a new trust deed and rules (1999 Deed and Rules). Among other things, the 1999 Deed and Rules sought to reduce the Plan’s rate of revaluation of deferred pensions. Some 20 years later, it was discovered that no section 37 confirmation could be located (whether one was given remains unknown), calling into question the validity of the changes introduced by the 1999 Deed and Rules.
Virgin Media asked the Court to determine three questions:
- On the assumption that no section 37 confirmation was ever obtained, was the amendment to the Plan’s revaluation provisions in the 1999 Deed and Rules void under section 37?
- If an amendment is void under section 37, is it void in respect rights accrued up to the date of the change only, or also in respect of accrued and future service rights?
- Does voidness under section 37 apply to all alterations to section 9(2B) rights, or only those alterations which would adversely affect section 9(2B) rights?
The Judgment is written in very clear terms, confirming that the legislation does in fact operate to render any amendment to section 9(2B) rights (whether adverse or not) void in the absence of a written section 37 confirmation, and that section 9(2B) rights include both past and future service rights.
As a result, the Plan’s revaluation rate was not effectively reduced by the 1999 Deed and Rules. The decision means that members retained a right to more generous revaluation rules between 8 March 1999 and 21 June 2010 (when a further definitive deed and rules was executed with the requisite section 37 confirmation), giving rise to around £10 million in additional liabilities for the Plan.
What does it mean?
The Judgment does not change the law. Rather, it clarifies the consequences of the existing law not having been followed. In broad terms then, the Judgment means that where an amendment was made which affected section 9(2B) rights without the necessary section 37 confirmation having been obtained, that amendment could be void.
However, the position is not yet set in stone. A notice on the Plan’s website confirms that the parties have been given permission for another hearing to consider what other documents, if any, might show that the necessary confirmation was given. They also have until late July to decide whether to appeal the decision. If they do appeal, we will have to wait for a Court of Appeal decision for more certainty.
Even if the parties do not appeal the decision, it seems likely that another case will find its way to the High Court in the not-too-distant future (by litigation timescales at least). This is an issue that is likely to affect a significant number of schemes, with potentially material consequences, and the Judgment leaves some questions unanswered, in particular what constitutes a valid section 37 confirmation.
Regulation 42 requires only that the confirmation be provided by the scheme actuary in writing. Whilst we have become accustomed to seeing this provided in the form of a certificate, it can be provided in another written format for example within written actuarial advice. There may be other evidence which could demonstrate the existence of section 37 confirmation having been provided, for example mention of it in trustee meeting minutes or member announcements relating to scheme changes. The additional hearing for which the parties have been given permission may well provide some clarity here.
In summary, trustees should not rush to assume that past amendments are now invalid if all of their deeds are not accompanied by a clearly labelled section 37 certificate.
If trustees are working on a particular project which requires them to assess the validity of previous amendments there may be some further due diligence needed, particularly if those projects are time sensitive. Otherwise, trustees should keep up to date with the latest position (which is unlikely to change materially before a decision is made on whether or not to appeal) and discuss any particular concerns with their legal advisers in the first instance. Additionally, input from the scheme actuary will be needed regarding copies of any written consent and any historical actuarial advice on whether or not a particular amendment needed actuarial confirmation.
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