Whilst the pensions industry watches its regulatory bodies and the Government closely for guidance, legislation and policy decisions, one must also keep an eye on decisions emanating from the UK courts. The summer of ’23 has seen a flurry of interesting pension decisions which could have significant impacts on schemes and members.
Virgin Media v NTL Trustees [2023]
The High Court has ruled on several issues relating to the statutory requirements concerning alterations to the rules of a contracted-out salary related pension scheme in section 37 of the Pension Schemes Act 1993, read together with regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 199 (SI 1996/1172). Under the combined effect of section 37 and regulation 42, the trustees were required to inform the scheme actuary in writing of proposed amendments and having considered the proposed amendments, the actuary had to confirm in writing to the trustees that the scheme would continue to satisfy the reference scheme test after the alterations had been made (“Actuarial Confirmation“). Unless the Actuarial Confirmation was obtained, section 37 states that the amendments are void.
In Virgin Media, the sponsoring employer of a former contracted-out salary related scheme sought directions from the court following the discovery that no regulation 42 confirmation could be located in relation to amendments to the scheme’s revaluation provisions purported to take effect from 8 March 1999. The judge subsequently decided that: (i) without Actuarial Confirmation, the amendments were void; (ii) Actuarial Confirmation was needed for amendments to future service rights as well as for amendments to past service rights; and (iii) even amendments that were beneficial to members would, in the absence of Actuarial Confirmation, be void.
This is the first time the High Court has ruled on the proper interpretation and effect of the provisions regarding alterations in section 37 and regulation 42. It’s fair to say that the decision has caused a stir in the pensions industry with different practices having been applied to the requirements around Actuarial Confirmation.
We understand that an appeal of the Virgin Media case is set for 2024. Furthermore, industry wide action to encourage the DWP to legislating to reverse the effects is also being mooted. However, assuming the judgment is not overturned, the implications are potentially far-reaching. Some high level points:
Trustees
- Due diligence on historic deeds and scheme paperwork may be required to ascertain how amendments were processed during the period between 1997 and 2016 when schemes were contracted out;
- Benefit corrections may be necessary if amendments are deemed void;
- Buy-ins and buy-outs may need to be paused whilst investigations are underway.
Sponsoring Employers
- Benefit correction exercises could mean additional expense and an increase in scheme liabilities (or decrease if benefit improvements reversed);
- Buyers in corporate transactions will want comfort that the issue has been looked at and appropriate protections are in place; and
- Those schemes that have already bought in may face a call for additional contributions to fund additional liabilities.
Insurers
- Will need to understand the level of risk faced and whether liability stemming from invalid deeds of amendment are carved out of policies; and
- The case could put a temporary halt on the buoyant buy-in market whilst the industry grapples with the potential uncertainty and fall-out from additional liabilities being uncovered.
Like everyone else we are waiting to see how events play out and for the time being are advising our clients to await events including the Appeal outcome.
BBC v BBC Pension Trust Ltd [2023]
The High Court has recently considered the limitations on the use of pension scheme amendment powers.
The rising tide of pension costs which has seen the BBC’s contribution to active members’ final salary pensions reaching 42.3% of pensionable salaries (nearly triple the rate it was in 2010 and over six times the employer contribution rate of 7% or 8% for members of its defined contribution scheme). The BBC sought directions from the High Court on the proper interpretation of a proviso in the BBC scheme’s amendment power. The proviso made clear that any proposed changes to the trust deed or rules which affected “interests” of the active members would be ineffective unless the scheme actuary certified that the changes did not substantially prejudice those interests.
The BBC’s position was that an active member’s “interests” only extended to their past service rights of scheme members. However, the Court’s view, on an ordinary interpretation of the language which was first introduced in a 1949 deed, was that there was nothing to suggest that there was any distinction to be drawn between “benefits already earned by past service” and “those which are yet to be earned”.
The upshot is that the wording places a significant limit on the BBC’s ability to alter the pension scheme’s accrual in future. Whilst many pension schemes have wider amendment powers which allow trustees more scope to agree to cease future accrual, the BBC scheme has a much more restrictive amendment power.
The decision does not take account of the economic context in which pension schemes operate. For instance the Court heard that the DB employees account for less than 40% of the BBC’s workforce but received more than 80% of its pension scheme spending. Inevitably, the BBC will now be looking at other means to address this issue. It has in any event been granted permission to appeal the High Court’s decision.
Trustees and sponsoring employers alike should ensure that scheme amendment powers are clear and unambiguous to prevent uncertainty as to the scope of the powers at their disposal.
abrdn (SLSPS) Pension Trustee Company Limited [2023]
This Scottish case was decided by Scotland’s highest court – the Inner Court of the Court of Session. The petitioner, abrdn (SLSPS) Pension Trustee Company Limited (trustee of the abrdn SLSPS – formerly known as the Standard Life Staff Pension) sought directions on whether it was entitled to make a decision to enter into an arrangement relating to a “de-risking” process regarding the pension scheme. The participating employers appeared as respondents to the petition and lodged answers supportive of the petitioner’s analysis of the questions for the court.
The pension scheme was established in 1937 for the purpose of paying pensions to retired employees of the Standard Life Assurance Company. Since the demutualisation of Standard Life in 2006, the principal employer responsible for the scheme has been Aberdeen Corporate Services Ltd.
In 2016 the scheme was amended to cease to offer further accrual of defined benefits in favour of providing the petitioner with a power to grant certain additional increases to defined benefit pensions without the agreement of the principal employer. The value of the available scheme assets later began to exceed the actuarial estimate of the assets required to secure the member benefits. This was viewed by the petitioner and the respondents as an opportunity to “de-risk” the scheme benefits and transform the discretionary increases into a guaranteed one.
A question arose as to what was to be done with any remaining surplus assets after all accrued defined benefits had been secured. The scheme rules were silent on this and there was a prohibition in the amendment power to change the rules to allow a refund of any contributions to the employer. The prohibition applied unless the principal employer was in winding-up.
The petitioner’s view was that the remaining assets would be subject to a resulting trust in favour of the participating employers. It therefore sought directions from the court asking whether it was entitled to enter into such an arrangement, and whether a resulting trust would arise as a matter of law.
The court agreed with the trustee that the employer is entitled to have the benefit of the surplus on a resulting trust for the following reasons:
- the scheme was non-contributory for scheme members, and they had received value for their contributions which had been paid to enhance their pension rights;
- the employers had funded the scheme’s deficit and in doing so had “not abandoned their right to surplus”.
Lord Tyre, delivering his opinion: “The essence of the emergence of a resulting trust is that the purpose of the trust has been fulfilled, leaving a surplus of funds in the hands of the trustee which is not required for the trust purposes. In those circumstances the truster becomes entitled to have the unused funds returned to him. On the basis of the facts set out in the petition and confirmed by the reporter, that is the position in relation to any surplus remaining in the hands of the petitioner after provision has been made for all of its liabilities to members and others, and for the expenses of completing the winding up of the fund.”
This decision is not binding on English law, however future court cases in England may well seek to rely on this judgment as ‘persuasive’. Overall, we consider this judgment to be very helpful in terms of determining who owns a scheme surplus where the trust provisions are unclear.