High Court overturns 25 year consensus on amendments to contracted-out DB schemes
The recent High Court judgment handed down Virgin Media v NTL has potentially far reaching implications affecting defined benefit pension schemes that contracted out on the salary-related basis after 1997.
Mrs Justice Bacon found that the lack of a so-called “section 37 certificate” invalidated amendments to benefits, for the past and the future. These certificates were widely thought to only apply to changes to the minimum contracted-out benefits. They were commonly not sought for other rule amendments.
Appeal seems to be under serious consideration and we understand an extended deadline has been given. In the meantime, trustees and sponsors who have to fund and invest to pay benefits from this kind of scheme should check their deeds and rules to see how confident they are that this technicality was met.
Partner Jane Kola commented: “We are still digesting the detail of this case and its consequences, but it seems to be the worst possible interpretation the judge could have reached when it comes to certainty over benefits. It could be a hammer blow for schemes looking to secure benefits in the buy-in market, or those who already have. It could undermine the whole basis for the transaction.”
Senior partner Anna Rogers commented: “This judgment could mean extra benefit cost for sponsors if closure to accrual, changes in index, or caps on increases or salaries are invalid. For members it may mean unexpected windfall benefits, but that’s not all good news because there are potentially winners and losers, with a transfer of value from some members to others. The issues will surely have to be decided by the Court of Appeal in this case or another one – unless the DWP is willing to fix this issue with retrospective correcting regulations.”
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