High Court overturns 25 year consensus on amendments to contracted-out DB schemes
At the end of last week the High Court handed down its judgment in the case of Virgin Media v NTL Trustees. This is another hammer blow to schemes in the search for certainty on the meaning of their trust documents and in particular what benefits members are entitled to. On the basis of this judgment it is likely that many schemes which were contracted out on a salary related basis from 1997 onwards will have made invalid amendments to their rules. The only question is how many and how much damage has this judgment done.
The case was about a legal technicality on the execution of pension scheme deeds known as section 37. It was introduced in 1997 when guaranteed minimum pensions were replaced with alternative salary related contracted out rights known as “section 9(2)(b) rights”. It was intended to ensure that schemes which benefitted from national insurance rebates had to provide benefits of sufficient value to members to justify that rebate. Section 37 was very poorly worded and exactly what amendments to scheme rules it applied to was unclear until it was clarified in 2013. The judge has decided that section 37 applied to all scheme amendments relating to benefits not just the contracted-out part.
In order to comply with section 37 scheme amendments had to be reviewed by the Scheme actuary and a written confirmation given that the scheme continued to comply with the requirements to be allowed to contract-out and receive the national insurance rebate. This had to be done before the amendment was effected. If the confirmation was not provided, the amendments are void. As the judge has decided that section 37 applied to all benefit amendments, this could cause real issues for all defined benefit pension schemes with contracted out benefits from 1997 onwards. Most believed that section 37 was confined to changes to benefits directly referable to the conditions relating to contracting out from 1997 onwards and that only potentially prejudicial changes to past service benefits were caught. The judge has decided that section 37 confirmations were needed for all benefit amendments whether they related to the contracting-out rules or not, whether they were improvements or reductions and whether the benefits had already been earned or were to be earned in the future (including closure to accrual).
We are still digesting the detail of this case and its consequences, but they could be far reaching. It’s the worst possible interpretation the judge could reach when it comes to certainty in the meaning of scheme rules and what benefits to provide. For schemes looking to secure benefits in the buy-in market or those who already have, this judgment is unwelcome news as it could undermine the whole basis for moving forward with the transaction. For sponsors it could mean significant extra benefit cost. For members it may mean unexpected windfall benefits, potentially with winners and losers if they prejudice the solvency of the scheme and lead to a transfer of value from some members to others.
Appeal seems to be under active consideration. We understand that the window to appeal has been extended so that the parties can continue the search for these certificates and assess the impact in terms of materiality.