The Court of Appeal Upholds the Virgin Media Ruling

Amendments to Post-1997 DB Contracted-out Benefits are Ineffective Without an Actuarial Confirmation

The Decision

The Court of Appeal has upheld the High Court's decision in Virgin Media Ltd v NTL Pension Trustees II Ltd and Others ("the Virgin Media case"), so the Virgin Media issues remain for defined benefit ("DB") pension schemes. Amendments to post-April 1997 service DB contracted-out benefits are invalid and ineffective without an actuarial confirmation.

The Statutory Requirement for an Actuarial Confirmation

Under the contracting-out legislation, some DB pension schemes were contracted out of the State Second Pension on the basis of providing a minimum level of benefits which satisfied the "reference scheme test". That reference scheme test basis of contracting out applied over the period between 6 April 1997 and 5 April 2016. The contracting-out legislation required that an actuarial confirmation be obtained by scheme trustees from the scheme actuary in relation to any amendment to reference scheme test benefits. That actuarial confirmation was to the effect that the minimum level of benefits under the reference scheme test would continue to be satisfied after the amendment was made. 

The High Court's Judgment in 2023

In June 2023, the High Court ruled that if such an actuarial confirmation was not obtained by the scheme trustees before making such an amendment, that amendment would be invalid and therefore legally ineffective. The High Court held that this principle applies to amendments affecting future service benefits for service after the date of the amendment, as well as past service benefits for service prior to the date of the amendment. The High Court further decided that this principle applies not only to amendments reducing benefits, but also to amendments which increase benefits. The relevant amendments in the Virgin Media case purported to reduce the rate of revaluation applying to deferred pensions in deferment. The High Court held those amendments to be invalid on the assumption that no actuarial confirmation had been obtained.

The Narrow Ground of Appeal to the Court of Appeal

The sponsoring employers of the relevant scheme in the Virgin Media case appealed to the Court of Appeal against the High Court's decision on the narrow ground that the invalidity of those scheme rule amendments  without an actuarial confirmation applied only to past service benefits for service prior to the date of the amendment and did not apply to future service benefits for service after the date of the amendment. The principle that the absence of an actuarial confirmation means that the amendment to scheme benefits is legally ineffective was not challenged on appeal and so that principle remains in force.

The Court of Appeal's Ruling

On 25 July 2024, the Court of Appeal dismissed the employers' appeal and upheld the decision of the High Court in the Virgin Media case. The Court of Appeal held that amendments affecting DB reference scheme test benefits are invalid if made without an actuarial confirmation, not only in the case of amendments affecting past service benefits for service prior to the date of the amendment, but also in the case of amendments affecting future service benefits for service after the date of the amendment.

Requirement for Legal Review of Past Scheme Rule Amendments

The Court of Appeal's ruling preserves the existing position under the High Court's decision in the Virgin Media case that DB schemes which were contracted out on a DB reference scheme test basis will need to take legal advice on the legal effectiveness of amendments affecting reference scheme test benefits over the period from 6 April 1997 to 5 April 2016. Such advice and such a review of the effectiveness of past scheme rule amendments will be required before such schemes can move to secure benefits, by way of a buy-in, a buyout or other alternative mechanism, and before any transfer to a DB superfund.

Potential Outcomes from a Legal Review

The required review of the legal effectiveness of past scheme rule amendments need not assume that no actuarial confirmation was obtained where such a confirmation was required, as was assumed in the Virgin Media case. Instead, a consideration of the available evidence is required, including the wording of the relevant amending deeds and surrounding documentation. Where amending deeds are found to be ineffective as a result of the Virgin Media case, that may increase the liabilities of the scheme and in certain circumstances might prevent a buy-in and buyout from happening. On the other hand, some scheme rule amendments, such as those which do not affect the amount of scheme benefits or which relate to defined contribution benefits only or which are designed to bring the scheme's contracting-out status to an end, did not require an actuarial confirmation.

Required Form of the Actuarial Confirmation

It is not necessary that an actuarial confirmation be attached to an amending deed affecting DB reference test benefits, in order for such a deed to be legally effective. The Court of Appeal's judgment included the helpful comment that the required actuarial confirmation need not have been a formal certificate appended to the amending deed, but that any written confirmation from the scheme actuary (in any written form) would suffice for the amending deed to be legally effective. Further, the Court of Appeal left open the possibility of a subsequent triennial certification (as required) by a scheme actuary of the scheme's compliance with the reference scheme test having the effect of validating otherwise ineffective rule amendments following such a triennial certification.

Possibility of Amending Regulations from the DWP

There remains also the possibility of amending regulations from the DWP to validate scheme rule amendments which would otherwise be invalidated by the principle in the Virgin Media case. A joint statement was issued on 29 July 2024 from a working group formed by the Association of Consulting Actuaries, the Association of Pension Lawyers and the Society of Pension Professionals  proposing that the Secretary of State for Work and Pensions (as she has power to do under section 37(2) of the Pension Schemes Act 1993) make regulations to validate retrospectively any scheme rule amendment affecting reference scheme test benefits, that is held to be invalid solely because a written actuarial confirmation was not received before that amendment was made. If such regulations were to be made, which would of course be a decision for the new Labour Government, that would provide a fallback position for DB schemes and their sponsoring employers if issues of invalidity of scheme rule amendments were to be raised based on the Virgin Media case.