NEWS   |    November 10, 2023

What amendment? The High Court throws uncertainty over years of cost saving changes to defined benefit schemes

The industry is still working through the detail of Virgin Media v NTL Pension Trustees and its consequences, but it seems to be an unwelcome interpretation when it comes to certainty over benefits. This uncertainty has a significant impact for lots of schemes whether they looking to undertake guaranteed minimum pension equalisation, preparing for pensions dashboard or to secure (or have secured) benefits with an insurer.

This High Court decision has cast doubt over the effectiveness of many years’ worth of cost-saving changes to defined benefit pension schemes designed to reduce members’ future service benefits. Some schemes could even move from surplus into deficit as a result, and sponsoring employers could in turn find themselves facing substantially increased liabilities. Transactions involving defined benefit schemes now face an added layer of validity risk and pricing uncertainty.

The case concerned certain rule amendments made between 1997 and 2016 to defined benefit pension schemes contracted-out on a salary related basis, with the Court holding that rule amendments in relation to rights under those schemes (known as “section 9(2B) rights”) made without an actuarial confirmation under section 37 of the Pension Schemes Act 1993 were void. The Court said that the requirement to obtain such a confirmation applied to amendments relating to benefits for both the past and the future, and whether they were detrimental to members or not.

For affected schemes this means that, if there was no section 37 confirmation in relation to a particular amendment, there is a risk of changes to members’ future service benefits made during the 2000s and 2010s being invalid. It might be the case that members have unwittingly been earning benefits on the original, more generous basis for a good many years. Clearly this could have a knock-on impact on the scheme’s funding position and payment obligations to the scheme.

This judgment could mean dramatic extra benefit costs for sponsors if closure to accrual, changes in pension increases or which price index is used are invalid. It also creates uncertainty for sponsors, trustees, members and the industry as a whole.

While some schemes will have been frantically searching though their old deeds and now breathing a sigh of relief that their scheme is not impacted, other schemes and their impending transactions or projects to determine benefits or get dashboard ready are being stopped in their tracks.  No scheme, regardless of where they are on their journey, wants uncertainty over the amount of benefits payable to members.

We understand it is expected that there will be an appeal before the end of the year, although definitive timings for any resulting judgment are not known at present.

For now, groups of companies with defined benefit pension schemes face an uncertain time while these issues are resolved, and corporate activity involving sponsoring employers is likely to bring them into sharp focus. A pragmatic, risk-focused approach to assessing questions of validity can often help with navigating the weeds and finding a proportionate way through to safer shores.

Beth and Kate’s article was originally published in Pensions Age, here (on page 25). 

The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.

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