The Court considered the scope and application of Section 37 of the Pension Schemes Act ("Section 37") and the linked Regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996 ("Regulation 42"). These two provisions were relevant to any amendments made to the rules of a DB contracted-out pension scheme prior to the abolition of contracting-out in 2016. They essentially required prior confirmation from the scheme actuary that the amendment would not result in the scheme no longer satisfying a statutory standard known as the ‘reference scheme test’. There has long been debate about the scope of these provisions in the pensions industry and the Court interpreted the relevant provisions strictly, concluding that they operated to completely invalidate any amendment made without the required actuarial confirmation. Unless successfully appealed or in the absence of other parliamentary intervention (which industry bodies are already considering seeking from the DWP), this case could have far-reaching consequences for many pension schemes that have not historically complied with the actuarial confirmation requirements of Section 37 and Regulation 42.

In more detail

Background 

Although the particular wording of the legislation has changed over time, with the key period for the purposes of the case being 8 March 1999 (the deed in question) to 21 June 2010 (when a later and clearly valid change did occur), Section 37 and Regulation 42 required that the rules of a defined benefit contracted-out scheme could only be altered if the pension scheme's actuary had considered the proposed alteration and confirmed in writing that he or she was satisfied that the scheme would continue to satisfy the statutory "reference scheme test", often referred to as "Section 9(2B) rights”, after the amendment. Until 2016 when DB contracting-out was abolished, the "reference scheme test" was the minimum statutory standard that a contracted-out pension scheme had to meet in respect of post-6 April 1997 rights in order to continue to be contracted-out. Actuarial written confirmations under Section 37/Regulation 42 were no longer required after the abolition of DB contracting-out.

There have long been doubts in the pensions industry about the scope of Section 37 and Regulation 42 and what schemes had to do in practice to comply with them. This was acknowledged in the Court ruling, with the relevant issues being described as being the subject of "considerable uncertainty in the pensions industry for some time". 

The facts of the case

A new trust deed and rules for the National Transcommunications Limited Pension Plan ("the Plan") was executed on 8 March 1999 ("the 1999 Rules"). The only substantive amendment to benefits made in the 1999 Rules related to reducing the rate of deferred revaluation for benefits built-up after the 1999 Rules were executed. The parties to the case had not located any confirmation from the Plan actuary that the alterations made by the 1999 Rules would continue to satisfy the contracting-out "reference scheme test", as required under Section 37, and so the judge was asked to proceed on the assumption that no confirmation was given.  Against that background, the Court was asked to rule on 3 questions:

Question 1: whether Section 37 made an amendment void in the absence of the written actuarial confirmation contemplated by Regulation 42.  If the answer to this question was "yes", then:

Question 2: whether the so-called “section 9(2B) rights” included rights attributable to future service (i.e. whether Section 37 requirements applied with respect to rights attributable to service after the execution of the 1999 Rules); and

Question 3: whether Section 37 only had effect in relation to "adverse" alterations.

The Court was asked to look at these questions on the basis of the legislation as it stood in 1999 (the specific wording of the legislation which the court considered applied between 6 April 1997 and 6 April 2013). A further trust deed and rules was executed in 2010 (which restated the revaluation amendment) and the actuarial confirmation required under Section 37 and Regulation 42 was provided in respect of that deed. This meant in practice that the amendments made to the revaluation provisions within the 1999 Rules were valid from 2010, and so the questions raised with the Court were only relevant in respect of pensionable service from 1999 to 2010. 

If the amendments were found by the Court to have been ineffective, this would affect around 430-450 members and would result in additional liabilities for the Plan of around GBP 10 million. 

The Court's findings

Question 1: Despite several counter-arguments raised by the Plan's employer, the judge ruled that the relevant legislation clearly precluded amendments where no prior actuarial confirmation had been given based on the express wording of Section 37. This meant that Section 37 rendered void the amendment to the 1999 Rules. More generally, it also likely means (absent court challenge in other cases) that any amendments made to other pensions schemes, insofar as an amendment was introduced without the actuarial confirmation required by Regulation 42, would also likely be ineffective.

Question 2: On the second question posed, regarding whether Section 37 and related provisions only applied in respect of past service benefits, the judge ruled that nothing in the language of the relevant regulation specified that it only applied to changes made to rights already accrued in the past. She noted that the purpose of the statutory actuarial confirmation mechanism was to ensure that the pension scheme continued to satisfy the statutory standard after an alteration was made. Accordingly, the judge ruled that an actuarial confirmation was required in relation to both changes to past rights and future service rights.

Question 3: On the question of whether voidness under Section 37 applied only to adverse alterations or to all alterations, the judge quickly concluded in her judgment that the requirement for actuarial confirmation, and the sanction of voidness under Section 37 absent such confirmation, applied to all amendments to the rules of a contracted-out scheme, and not merely those which would or might adversely affect benefits. This is because the assessment of what were adverse and beneficial alterations would in-itself require some form of actuarial assessment.

Commentary

The judge in this case was not persuaded to move away from what she viewed as the clear language of the provisions and interpret Section 37 in a manner which avoided, as the employer’s Counsel described it, the “draconian” effects of invalidity.

Given the industry uncertainty over the years surrounding the scope and application of Section 37 and related provisions and the risk of non-compliance in many instances, it will be interesting to see whether the judgment will be appealed, and/or whether Parliament will intervene to rectify non-compliant past practice, and/ or indeed whether there could be further cases on different facts that could potentially be more amenable to arguments that the absence of written actuarial confirmation may not be fatal. 

For many schemes that made benefit changes in the relevant period between 6 April 1997 and 6 April 2013, they may wish to wait until the dust settles and there is clarity on these points before deciding if (and then what) action needs to be taken. However, there may be certain schemes where a more immediate assessment of their scheme is required, for example if the scheme is in the process of a buy-in/buy-out where potential invalidity of past changes will likely need to be addressed one way or another, for example through insuring greater benefits or seeking risk protection or, conceivably, directions from the court.

Key takeaways

This case will be of interest to many trustees and employers of formerly contracted-out DB pension schemes, given its possible wide-ranging implications where non-compliant amendments were made in the past – whether written actuarial confirmation cannot now be located, or there is doubt over whether it was ever provided by the actuary at the time. As noted, we suspect many schemes will await further clarity before investing any significant time in investigating past benefit changes, but scheme circumstances, or the potential impact of invalidity of past changes, may justify an earlier assessment, even if on a preliminary basis.

We will issue further updates when more is known about the future trajectory of this case. 

Please speak to your usual contact at Baker McKenzie if you would like to discuss this area further. 

A copy of the case can be found here.