Defined benefit pension scheme closures may turn out to be void and unenforceable

Employers who provide defined benefit pension schemes for their employees, or have done so in the past, may face unexpected additional costs and new liabilities following the recent Court of Appeal judgment in the case of Virgin Media Limited v NTL Pension Trustees II Limited.

Background

Until April 2016, defined benefit pension schemes were permitted to ‘contract-out’ of the earnings related part of the State pension provision. Broadly, this meant that a member of a scheme that was contracted-out received certain minimum benefits from their scheme which, otherwise, would be provided by the State. 

Between April 1997and 2016, defined benefit pension schemes were contracted out on a "reference scheme" basis by which, in order to be able to contract-out, a scheme had to provide benefits that were at least as good as a notional "statutory standard", as certified by the scheme’s actuary.

Legislation was introduced by way section 37 of the Pension Schemes Act 1993 (“S.37”), to restrict the way in which the rules of contracted-out defined benefit schemes could be amended, in relation to rights required by the reference scheme test.

The new legislation meant that an amendment could not be made to pension scheme’s rules without the scheme’s actuary confirming that they had considered the proposed amendment and giving confirmation in writing to the trustees they were satisfied that the scheme would continue to satisfy the statutory standard.

Judgment

The judgment stems from an intention of the trustees of the National Transcommunications Limited Pension Plan to amend certain provisions of the scheme’s rules. As part of that process, they discovered that there was no record of actuarial confirmation regarding section 9(2B) right from a previous exercise to amend the scheme’s rules.

As a result, the High Court was asked to interpret the statutory provisions relating to contracting-out and determine the consequences of the missing actuarial confirmation.

The High Court held that failure to provide actuarial confirmation meant that amendments to contracted-out defined benefit would be rendered void. S.37 clearly stated that non-compliant alterations could not be regarded as valid or effective.

In July 2024, the Court of Appeal upheld that judgment.

Potential impact

As the Judgment stands, any contracted-out defined benefit scheme which was amended in a manner that affected members’ benefits, between 6 April 1997 and 6 April 2016, will be void if cannot be shown that the scheme’s actuary provided the required confirmation.

This potentially includes amendments to close schemes to future accrual and to change the way in which members’ benefits are calculated, for example a switch from a final salary basis to a CARE basis.

The legislation does not specify how any confirmation from a scheme’s actuary should have been provided. Rather, it says that an actuary is required to have considered a proposed amendment and:

“…confirmed to the trustees in writing that he is satisfied that the scheme would continue to satisfy the statutory standard.”

So, whilst there may not be a specific confirmatory ‘certificate’ from the actuary in a particular case, it may well be that a scheme’s actuary gave such confirmation during the course of discussions relating to a particular amendment. However, it should be borne in mind that the Virgin Media case came to the Courts as a result of the parties not having been able to discover any records of any such confirmation during an historic amendment.

What happens next?

Many in the pensions industry are convinced that because of the potential impact of historic amendments being void, the Department of Work and Pensions will intervene. Potentially, there may be a retrospective change in the law to validate all amendments to contracted-out defined benefit pension schemes.

In the meantime pension scheme amendments, including those to close schemes to future accrual, may come under challenge. Challenges may take the form of demands for schemes to be re-opened or for benefits to be put back to their previous, more generous, levels. Claims for compensation and loss of opportunity may also arise.

As the ultimate guarantor of defined benefit pension schemes, some former sponsoring employees are already being advised to consider ringfencing funds to deal with any potential arising liabilities.

Employers who did close a defined benefit scheme between 1997 and 2016, or who kept open their scheme but reduced the value of the benefits, may wish to undertake initial discussion with the scheme’s trustees to determine whether any of the amendments are in scope of the decision in Virgin Media.