Beth Brown: High Court calls into question amendments to contracted out pension schemes

pension schemes contracted outAnyone involved with pension schemes which contracted out on a salary-related basis after 1997 will want to be aware of a recent High Court ruling which could impact their scheme.

In Virgin Media v NTL Trustees and others, the High Court held that the absence of a Section 37 certificate invalidated certain amendments because the scheme had contracted out on a salary-related basis. Regulations required a certificate for all amendments to rights built up by members for post-April 1997 contracted out employment, known as s9(2B) rights. The court held that this applied to amendments to both past and future service, and to all benefit amendments, as well as improvements.

As a result, it is possible that schemes will be paying the wrong benefits. This could mean increased benefit costs for sponsoring employers, for example, where there have been changes in index, reduced caps on increases, or salaries. For members, it may mean unexpected windfall benefits for some, potentially at the expense of others. Hard-coded but unintended benefit features may now fall away.

Some schemes have started looking into the potential impact of the judgment. If they contracted out on the money purchase basis there may be none. It may also be that, on investigating the position, a scheme had certificates for all changes or if not, it may be possible to re-document invalid benefit improvements. If after this triage process it seems there is an issue, it may be considered premature to take immediate action because leave to appeal has been granted.

Also, the Department for Work and Pensions has power to issue retrospective correcting regulations on contracting out and has used such a power before.

If the requirement does apply and the scheme decides to take action, the first step is to decide what degree of certainty the trustees and sponsoring employers want or need in terms of benefits, especially if a scheme is imminently looking to secure benefits in the buy-in market or a sponsoring employer is wanting to buy or sell a business. Amending now to reinstate a cap or changed index might prevent any unintended liability getting bigger. However, trustees and sponsoring employers will want to be careful not to rush into making an irreversible decision before they have the full picture, particularly given that the Virgin Media case could be overturned.

Those schemes potentially affected should check any recitals in relevant deeds of amendment and whether they contain or refer to written confirmation from the scheme actuary. Other evidence of confirmation having been given could be found elsewhere, for example communications with the scheme actuary around the time the amendment was made. In the absence of clear evidence, in certain circumstances, it may be possible to draw inferences.

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As always with pensions, trustees and sponsoring employers should manage legal risk by making informed and holistic decisions.

Beth Brown is a partner at Arc Pensions Law