Setting the scene
Rewinding the clock, readers may recall that until 5 April 1997, many defined benefit schemes were contracted-out of the state earnings related pension scheme. This allowed employees and members to pay a lower rate of national insurance contributions and in return, most schemes committed to provide a guaranteed minimum pension (GMP). The basis on which minimum benefits had to be provided was changed after that date with post 5 April 1997 contracted-out benefits being known by the catchy name of Section 9(2B) rights.
The legislation brought-in to change the contracting-out regime included an important protection - in section 37 of the Pension Schemes Act 1993. This provided that Section 9(2B) rights could not be changed unless the scheme's actuary had confirmed to the trustees that, after the proposed change, the scheme would continue to provide benefits of at least the minimum contracted-out amount. What had been uncertain until last week's High Court ruling was the effect of not obtaining a confirmation.
In a short judgment, Mrs Justice Bacon decided that a failure to obtain confirmation from the scheme's actuary relating to a proposed change rendered the change void, in so far as it effected Section 9(2B) rights. Virgin's counsel tried to limit the damage, arguing that only benefits accrued after the change should be struck-down, or only changes which would or might adversely affect benefits. The judge was not convinced and held that the change in its entirety was void, although noting that for amendments taking effect after 5 April 2013, the law was changed so that the restriction applied only to post amendment benefits.
Implications and actions for employers and trustees
Given the estimated cost of £10 million to Virgin, it is likely that the judgment will be appealed. To that degree, it remains something of a case of wait and see for trustees and employers as to how the case could impact their scheme.
In the meantime, trustees and employers would be well advised to review benefit changes made between 6 April 1997 – 5 April 2016 to check that actuarial confirmations were obtained and, where they were not, assess the potential implications for members' benefits and scheme funding. Where advisers look to be at fault, consideration will need to be given to litigation time limits - where time limits are getting close, the usual approach is to try to agree with potential defendants an effective stopping of the clock, using what is known as a Standstill Agreement.
Schemes looking to buy-out will need to be particularly diligent to identify any potential problems and consider their implications, engaging with insurers if additional benefits would need to be secured if the ruling is not reversed on appeal, either in part, or in full.
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