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Speaker
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Transcript
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Helen Cracknell, Associate, Burges Salmon
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Hi everyone. Welcome to the fourth episode of season 4 of the Burges Salmon Pensions Pod.
In today's episode, myself and Luke, a trainee in our Pensions team at Burges Salmon, are going to be discussing the recent pensions case of Virgin Media Ltd and NTL Pension Trustees II Ltd. Luke, thanks for joining me.
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Luke Parry-Billings, Trainee Solicitor, Burges Salmon
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Thanks, Helen. So, today's episode will focus on giving some background to the case and its upcoming appeal, and then we'll discuss the sorts of questions that our clients are asking us in relation to the case and how we're responding to these.
Helen, I think it'd be useful to start with some background to the case so, can you remind our listeners what the case considered?
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Helen
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Thanks, Luke. In this case the high court considered the question of whether amendments made to the rights to the payment of pensions and accrrued rights to pensions in a contracted-out scheme, typically called section 92b rights, would be invalid in the absence of actuarial confirmation that the scheme would continue to meet the reference scheme test. So, as I'm sure a lot of our listeners will be aware, this actuarial confirmation is required by section 37 of the Pension Schemes Act 1993 and regulation 42 of the Occupational Pension Schemes Contracting Out Regulations 1996.
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Luke
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Sure, and was this a unique case?
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Helen
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So, this is the first judicial determination on the operation of section 37, in terms of whether to be valid an amendment to a contracted-out scheme needs this actuarial confirmation, but we are actually aware of other instances where the compliance with Section 37 has gone to trial but judgment was not given as the case settled in that instance.
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Luke
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Thanks Helen, and just to give a a bit more background perhaps about the case, with respect to the parties that were involved in it. The National Trans Communications Ltd pension plan was, at the relevant time, a contracted out defined benefit occupational pension plan and therefore subject to the reference scheme test and amendments after the 6th of April 1997 would require a section 37 certificate.
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Helen
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Yes.
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Luke
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In 1999 the employer and the trustees of the NTL plan executed a definitive trust deed and rules which sought to amend the plan's re-evaluation provisions by reducing the rate of revaluation of deferred pensions under the plan. In circumstances where the parties could not locate the relevant actuarial confirmation, the employer sought the Court's view on the validity of the changes made by the 1999 deed and rules, and the application to Court proceeded on the assumption that actuarial confirmation of compliance with the reference scheme test did not exist.
Now, Helen, if you can perhaps break down the arguments put forward, firstly by the principal employer?
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Helen
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Yes of course Luke, so the principal employer argued three things. Firstly, that non-compliance with the legislation did not render the amendments automatically void, because the legislation was not intended to have that effect.
Secondly, alternatively, the principal employer argued that if the court found that this was the intention of the legislation, then only changes to past service rights would be rendered void, leaving the Amendments made to the 1999 deed and rules, which affected future service, valid and effective.
And lastly, as a further alternative, the employer argued that if the legislation rendered both past service and future service changes invalid, only changes which adversely affected contracted out benefits would be caught, and other changes with no impact to contracted out benefits would remain valid and effective.
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Luke
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Sure okay, and can you also explain the alternative or arguments brought forward?
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Helen
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Yes of course. So, these applications to courts, by way of background, proceed on the basis that members' interests are represented by a representative beneficiary, commonly known as a Rep Ben, so in this case the Rep Ben argued that absent the actuarial confirmation required by the legislation, the correct outcome was that the Amendments made by the 1999 deed and rules were void and of no effect. They also wanted to argue that the regulation 42 requirements apply to both past and future service benefits. And lastly that such voidness applied to all relevant alterations and not just those which were adverse.
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Luke
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Okay thanks Helen, and just as a bit of further context, I understand the trustees adopted a neutral position in the proceeding things?
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Helen
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Yes, they did.
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Luke
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Great, thanks.
Now moving on then, would you be able to explain to our listeners what outcome was reached in the case?
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Helen
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Yes, so the Court held three things, so firstly that the wording cannot be altered in section 37 is clear and unambiguous, so nothing in section 37 nor regulation 42 allowed for a non-compliant alteration, such as the one in the 1999 deed and rules, to be deemed valid in circumstances where the legislation had not been complied with to the letter, as was the case here. So therefore, the Court held that an amendment was potentially void if the trustees did not obtain the required actuarial confirmation.
And then secondly in response to the employer's arguments that the purpose of section 92b Rights was to protect benefits accrued as at the date of the alteration and not future service benefits, the Judge concluded that section 92b included both parts and future service rights.
And then lastly the Judge also dismissed the employer arguments the regulation 42 subsection 2 only required actuarial confirmation where alterations would or might adversely affect section 90b rights, and, if I quote from the Judgment here, the Judge concluded that regulation 42 subsection 2 provided on its face a straightforward and unambiguous mechanism, requiring actuarial confirmation in relation to any alteration to section 92b rights and, in my own words, not merely to alterations that would or might adversely affect such rights.
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Luke
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Thanks Helen, so there's obviously quite a lot there but for those interested what does the Judgment mean?
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Helen
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So, the court, really to boil it down, they found against the employer on all three of their arguments, meaning that the absence of actuarial confirmation in respect of changes to section 92b rights, even including improvements to those rights, is, on the face of it, potentially problematic. So, whilst the need to obtain actuarial confirmation was widely known, there has been uncertainty for many years as to what form the confirmation referred to in the legislation should take, and also what the consequences might be if the confirmation was either not obtained or was obtained but mislaid.
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Luke
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Okay and the immediate reaction in the legal industry was that the case may be subject to appeal or indeed government intervention, and I understand an appeal is coming up, isn't it?
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Helen
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Yes, so permission to appeal the Judgment was granted by Mrs Justice Bacon in July of 2023 and the basis of the appeal is currently unknown and there isn't full clarity as to when the appeal's due to be heard, although we have heard rumours that it will be early in 2024.
And you touched on government intervention there Luke, we would expect that if there is any government intervention in the case, this wouldn't happen until after the appeal judgment.
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Luke
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Yes of course, I suppose that's understandable.
So, thinking more widely now, how have we seen our clients reacting to the case?
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Helen
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So really the Judgment raised a lot of unanswered questions and introduced a lot of uncertainty.
So firstly, the question of what will or will not suffice for actuarial confirmation that a scheme would continue to meet the reference scheme test, so some people have previously interpreted this to mean a certificate signed by a scheme actuary, however the legislation is completely silent on the form that the confirmation should take.
And some other questions we've been hearing is what compliance looks like, and, in particular, what should be done if the scheme actuary believes that confirmation was addressed, but there are no documents supporting that position one way or the other. I've had a lot of clients where this has come up in the context of buy in and buy out negotiations, and they've been asking how these should be affected, or if they are at all affected.
And lastly, really the question of whether employers and trustees should go searching for these actuarial confirmations at this stage. So it's really this last question about what action should be taken as a result of the case that we've been asked to advise on many times by clients very recently.
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Luke
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Sure, so there are perhaps two, not to oversimplify it, perhaps two different approaches that you might take. One by undertaking a full audit, or perhaps by undertaking no action.
Could you maybe start by detailing a bit more the points in favour of undertaking a full audit?
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Helen
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Yes, so this is really looking at one of our clients where we've been specifically advising the trustees on how to approach this section 37 issue. So given that leave to appeal has been granted and the fact there are many unknowns as we've just mentioned, we do consider the options for trustees range from taking, as you said Luke, no action at this stage, to conducting a full audit of the scheme documents to check for compliance. And it's ultimately for trustees to determine what, if any, action to take in response to this case.
But firstly, if we cover points in favour of taking a full audit of the scheme documents, we advised one of our clients that there are many points in favour of this. So firstly, it's open to the trustees to choose to check the scheme documents to confirm that this isn't an issue for them. Secondly, a review may provide the certainty that they want that there is no issue for the scheme, for example where relevant actuarial confirmations are available and lastly there is the question of whether insurers may specifically ask questions of the trustees on this point, although this is an uncertain approach at this very moment and we haven't, I personally haven't, seen many insurers ask whether the trustees have considered the actuarial confirmations.
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Luke
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Okay yeah, so it's not a clear-cut issue at all?
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Helen
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No, definitely.
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Luke
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And at the same time, I suppose, looking at the other side, what would you say are the arguments for taking no action?
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Yes, so for this specific trustee client, we advised that firstly, if they took no action, it would mean that the trustees could proceed to wind up their scheme and complete the wind up, and therefore if the scheme is wound up the trustees won't be under obligation to monitor developments in the law, as they would have been discharged from that role. The point for taking no action, is that the trustees with this client case, they aren't actually aware that there is an actual issue with the scheme in respect of section 37.
So, it's really worth bearing in mind for our listeners that trustees are under a duty to administer the scheme benefits correctly, but there isn't an overarching duty to look for problems each time there's new case law and similarly, advisors shouldn't look for problems unless they've been instructed to do so. And we keep mentioning the uncertainty, but even if the position of the scheme in this case was considered in detail, we advise that it may not be clear from the available records whether the relevant actuarial advice was given and so a review may not deliver any clarity for these trustees anyway.
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Luke
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Okay and the need for Section 37 confirmation, it's not a new requirement, is it?
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Helen
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No, so it has been brought to the forefront by this recent case but, as you said Luke, it's not a new requirement and we therefore have advised that it's within the range of reasonable decisions for the trustees for this particular case, if they aren't actually aware of a particular issue and aren't concerned with compliance regarding actuarial guidance on amendments, to proceed as they are without carrying out a full order of the scheme documents.
And one last point in favour of taking no action for these specific trustees, was that whilst we're waiting for the case to potentially work its way through the courts, for example through the appeal system, this effect is currently uncertain. The law isn't settled and it's not clear currently, even if you do find an issue with scheme documents, what the ramifications are.
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Luke
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Okay and looking at risk, is there any comfort potentially trustees can take from the employer of their scheme?
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Helen
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Yes, so there is a lot of talk in the industry about residual risk insurance but also if the employer of a scheme is comfortable with standing behind any residual risk this could provide trustees with sufficient comfort on this kind of issue.
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Luke
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Okay yes, that all makes sense and I suppose there's a lot there and it's not a clear-cut issue by any means and the approach that trustees and employers take may vary depending on the circumstances.
But if we were to narrow it down, what perhaps is the main takeaway for our listeners?
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Helen
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Yes, thanks Luke.
So, it's clear from this podcast episode it's a very nuanced area and, as you mentioned, the outcome for each trustee and each employer will be scheme specific. So, whilst the advice for many schemes may be that it's reasonable to adopt a wait and see approach for now, until the appeal has worked its way through the courts and we do have more certainty, it's really important and we would really emphasise that trustees continue to review any decisions that they make as the situation develops and really engage with their lawyers on this topic.
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Luke
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Okay thanks a lot Helen for sharing the detail behind the case and how we're advising on it. I hope that's been helpful for those who have listened.
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Helen
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Thank you for listening to the Burges Salmon Pensions Pod.
If you'd like to know more about our Pensions team and how our experts can work with you, you can contact myself, Chris, or any of our team via our website.
All of our previous episodes are available on Apple, Spotify or wherever you listen to your podcasts. Don't forget to subscribe, and thanks for listening.
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