DB schemes could face extra costs after High Court judgement

The High Court has reached a judgement which could have far-reaching cost implications for contracted-out defined benefit (DB) schemes, in the case of Virgin Media vs NTL Pension Trustees II Limited.

Virgin Media asked the High Court to clarify the correct interpretation of historic contracting-out (SERPS or State Earnings Related Pension Scheme) law, in relation to the National Transcommunications Limited Pension Plan (a pension scheme which predecesses Virgin Media, which remains the scheme’s sponsor) between 6 April 1997 and 6 April 2023.

The case centres on whether amendments made to the way in which the scheme reevaluates members’ benefits should stand.

The changes, which were made in the scheme’s Second Definitive Trust Deed and Rules dated 8 March 1999, amended the plan’s reevaluation provisions from 6 April 1997.

However, Regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996 requires schemes to receive actuarial confirmation that the changes would still mean members were being provided benefits to the value of at least the minimum contracted-out amount. This confirmation should take the form of an accompanying section 37 certificate.

The High Court judge, Mrs Justice Bacon, found that the changes made by the scheme were voided by its failure to obtain a section 37 certificate. The cost to Virgin Media is estimated to be around £10m.

What does this mean for other pension schemes?

Until now, this area of law had been untested. This judgement means that any schemes which cannot produce a section 37 certificate for historic changes could be forced to reverse them.

Penny Cogher, pensions partner at law firm Irwin Mitchell, said: “Mrs Justice Bacon rightly commented that the questions considered in the Virgin Media Limited case have been the subject of considerable uncertainty in the pensions industry for some time, but have not yet been determined in proceedings concerning other scheme.

“Because of this, many trustees and employers of contracted out schemes have paused on the question as to whether amendments to such a scheme, without an obvious accompanying section 37 certificate, are valid. Now we have the judgment, this blinkered approach is no longer defensible.”

Lawyers are divided on whether Virgin Media is likely to appeal the case. Cogher’s opinion is: “Given the amounts involved for the particular scheme, appealing the judgment may not be likely and also there is little scope under the Regulations for further appeal. I think it more likely that approaches will be made to the Pensions Minister and the DWP to request the issue of further regulations, as allowed for under the main 1996 Regulations, to remedy the problem this way. There is no doubt that this approach could easily be justified by the Government.”

Cogher called for guidance from the Pensions Regulator, concluding: “Without further regulations, the pensions industry once again looks incompetent. Members’ benefits (past and future) again become uncertain from changes that have been made more than 20 years ago and there will be an element of a lottery as to which schemes can still find old section 37 certificates, which never had them for whatever reason and which had them but have now lost them but have some proof in terms of email exchanges meaning it more likely than not that there was a section 37 certificate.”

'Hammer blow' for pension buy ins?

Anna Rogers, senior partner at Arc Pensions Law, added: “This judgment could mean extra benefit cost for sponsors if closure to accrual, changes in index, or caps on increases or salaries are invalid. For members it may mean unexpected windfall benefits, but that’s not all good news because there are potentially winners and losers, with a transfer of value from some members to others. The issues will surely have to be decided by the Court of Appeal in this case or another one - unless the DWP is willing to fix this issue with retrospective correcting regulations.”

The case could also have implications for pension schemes going through buy-ins and buyouts. Jane Kola, partner at Arc Pensions Law, said: “[The case] could be a hammer blow for schemes looking to secure benefits in the buy-in market, or those who already have. It could undermine the whole basis for the transaction.”

It is early days, and the pensions industry is still digesting the High Court ruling. Lawyers encourage pension schemes to watch as this case develops; further guidance and/or interventions from the government and the Pensions Regulator are likely.