Pension professionals have called on the Department for Work and Pensions to intervene as a Court of Appeal decision in Virgin Media v NTL creates winners and losers among scheme members, as well as work for affected defined benefit schemes and potential extra liabilities for sponsors.

 

Trustees of previously contracted-out DB schemes will need to ensure they have an actuary’s confirmation for pension changes for all past and future service, whether adverse or not, during the period of contracting out, as the Court of Appeal has upheld the ruling in Virgin Media v NTL Pension Trustees II Ltd and others, in a judgment published on Thursday. The ruling interprets the effect of section 37 of the Pension Schemes Act 1993. 

It means Virgin Media is now liable for extra accrual valued at 1-2% of total liabilities in respect of 430-450 members. This is because the NTL Pension Scheme could not produce written confirmation by an actuary that a reduction in revaluation rates, decided in 1999, met the reference scheme test under contracting-out rules.  

The judgment notes that to keep the 1999 amendment valid, “all that was required was written confirmation – but to date no such written confirmation has been found”. 

 

The court said the change therefore only came into effect with the next amendment in 2010. The three judges also agreed that the requirement to have actuarial confirmation applies to past and future service, and includes all changes, not just adverse ones. They acknowledged the absence of written confirmation does not mean the scheme did not meet requirements, yet still came to the conclusion that changes are void without one. 

 

A spokesperson for Virgin Media said: “We brought this claim to establish clarity for the trustees of the NTL Pension Scheme and we’re grateful for the court’s guidance. We’re now reviewing the decision and will work with all necessary parties to ensure that the pension scheme is being administered correctly.” 

 

mallowstreet understands the extra payments are not material to the company. 

 

 

DB schemes will now need to ensure they have a certificate or written confirmation from an actuary for any amendments made during the period of contracting out, or their sponsor could be on the hook because of an administrative error.  

 

Anna Rogers, a senior partner at law firm Arc Pensions Law, said it made no sense for rule changes to be invalidated if the benefits were good enough to meet the contracting-out test. 

 

Rogers suggested the ruling creates upheaval for schemes and members and called on the Department for Work and Pensions to intervene. 

 

“The effect is unpredictable and unfair to members caught in yet another pensions drafting lottery. There will be losers as well as winners if generous terms that were ‘hardcoded’ are struck out, or unintended benefits for some mean reduced benefits for others,” she said. 

 

“We are calling on the DWP to intervene swiftly and announce that it will remove the unintended consequences of section 37,” Rogers added. 

 

She explained that the DWP has the power to validate amendments retrospectively and has done so before.  

 

“We need a modern version of the Validation of Rule Alterations Regulations that were made in 1998,” she said. 

  

Rogers said that as in investments, funding or covenant, risk is inherent in legal questions, and made the case for a more risk-based approach. 

 

"Lots of amending deeds attach a copy [of a s37 certificate], but that’s not required, and a ‘confirmation’ can take many possible forms. We think what trustees need is evidence, rather than proof, to be decided on the balance of probabilities.” 

It is unclear whether there will be a further appeal by the employer to the Supreme Court, said Lesley Harrold, a consultant at law firm Norton Rose Fulbright, but added, too, that the DWP has the power to validate scheme amendments retrospectively.

This "could be the swiftest and most satisfactory resolution to what will otherwise be a huge and wide-ranging problem", she suggested. 

Before any possible governmental action, schemes will need to investigate the status of past amendments and whether the required actuarial confirmation was obtained and recorded at the time, she added, with possible increases in liabilities potentially having a knock-on effects on those negotiating a buyout or buy-in, as well as for trustees’ professional indemnity insurance. There could also be tax implications flowing from a past amendment now being found to be void, she remarked.

"Without intervention from the DWP, the ramifications of calling into question past amendments are likely to create an enormous work overload for scheme trustees and administrators who are already dealing with major projects such as the scheme funding regime, GMP equalisation and dashboard implementation," Harrold said.

 

The judgment is creating a headache for schemes and sponsors alike. The chair of the Association of Consulting Actuaries, Stewart Hastie, agreed the consequences of the decision were “a real concern with significant ramifications for sponsors and schemes that are unintended and unnecessary”. 

 

The ACA too is looking to the government “to bring forward clarifying legislation or regulations” to help schemes and their sponsors out. 

Hastie said: “Without clarifying action, we also fear this could add unbearable pressure to scheme administration and member services."

 

The most immediate concern was financial reporting for sponsors, who might need to recognise “material [profit and loss] charges that later become unwound and unnecessary”, he warned.

 

The court’s decision is creating unnecessary work, suggested David Hamilton, chief actuary at consultancy Broadstone: “It is frustrating that significant amounts of time and money that could be spent more productively will now need to be ploughed into evidencing or justifying historic decisions that all parties... were entirely comfortable were made properly."

 

A DWP spokesperson said the department has been following this case and has been “in close contact with industry throughout”.  

 

“It is important that schemes, their members, and sponsors all continue to have complete confidence that the pension system operates effectively,” the spokesperson said. “We will carefully consider any wider implications for both schemes and scheme members as we explore the implications of today’s judgment.”