20 June 2023
A recent case has clarified the risks of historic pension scheme amendments having been made without obtaining a section 37 certificate in cases where this was required. The judgment is likely to have implications for a wide range of schemes and their sponsoring employers, but particularly those looking to secure benefits with an insurer or where a corporate transaction is proposed.
The judgment in Virgin Media Limited v NTL Pension Trustees II Limited and others confirms that amendments to schemes that were contracted out on a "reference scheme" basis and which affected "section 9(2B) rights" are void unless a section 37 certificate was obtained in respect of the amendment. This is the case whether the amendment affects rights in respect of past or future service.
Section 9(2B) rights were defined for the purposes of the relevant legislation as including rights to payments of pensions and accrued rights to pensions, other than AVCs.
There will have been amendments to schemes for which a section 37 certificate was not obtained. This may for example be the result of a misunderstanding as to the circumstances in which a certificate was required. In particular the reference to "accrued rights" in the definition of section 9(2B) rights may have resulted in some advisers taking the view that a certificate was only needed where benefits in respect of past service were to be affected.
Where amendments have been made which affected section 9(2B) rights and no section 37 certificate was obtained, advice should be sought as to the appropriate next steps for the trustees to take. Trustees may wish to be cautious about taking steps that may be hard to reverse while the implications of the judgment are worked through. Nonetheless, determining the correct benefits payable under the scheme will likely have more urgency should a trustee be in the process of buying out benefits, particularly if the trustee is looking to take out residual risks cover. To that end, while confirmation of compliance with section 37 formalities often falls "out of scope" of a standard benefit specification review, trustees may want to think about whether it should now be included so that any issues can be understood and dealt with before going to market. There may also be implications for employers and investors looking to undertake a corporate transaction where there is a defined pension benefit scheme, since if past amendments are void this may mean that there are additional benefits in the scheme that need to be funded.
Between 6 April 1997 and 5 April 2016, many defined benefit pension schemes (and a smaller number of defined contribution schemes) were contracted out on a "reference scheme" basis. This allowed employers to deduct and pay National Insurance contributions at a reduced rate in respect of employees participating in their pension scheme, and in exchange the scheme had to provide benefits that (for at least 90% of members) were at least as good as a notional "reference scheme". The actuary would certify that the scheme met this "reference scheme test".
In order to ensure that schemes that were contracted out on this basis were not subsequently amended in such a way as to no longer meet the reference scheme test, the legislation provided that the rules of such schemes could only be amended in relation to section 9(2B) rights where (broadly):
The rules of the National Transcommunications Limited Pension Plan (the "Plan") were amended on 8 March 1999 to reduce the rate of revaluation for deferred pensions under the Plan. The amendments did not affect any benefits already earned before the date of the amendment. No section 37 certificate was appended to the deed of amendment. The Plan was subsequently amended in 2010 to terminate accrual, and this 2010 deed of amendment did include a section 37 certificate.
If the 1999 amendment was void, this would give around 430 to 450 members deferred revaluation at a greater rate than had been intended for the period between 8 March 1999 and 21 June 2010 when accrual was terminated, with an additional cost of around £10m.
The judge concluded, in short, that amendments made affecting section 9(2B) rights would be void in the absence of a section 37 certificate. This was the case whether the amendments affected benefits for future service only or for past service as well. Interestingly, it was held that this was the case even if the amendments were not adverse.
The judgment indicates that the questions being put to the Court were asked "to inform further factual enquiries that may be made by the parties in relation to the question of whether an actuarial confirmation was in fact provided to the 1999 deed of amendment and, if so, when". Presumably this indicates that the parties are now in the process of reviewing all available materials to determine whether there is any evidence that will enable them to reach a conclusion that a certificate was issued. Whether, in the absence of such evidence, there will be an appeal remains to be seen.