Virgin Media v NTL: Bad news for the pensions industry

Contracting out

From 1978 it was possible for defined benefit pension schemes to contract out of the additional state pension. To contract out the employer was required to provide prescribed benefits in place of the additional state pension. 

From 6 April 1997 a contracted out pension scheme needed to provide benefits broadly equivalent to, or better than, benefits set out in a “reference scheme test”. Actuarial confirmation was required to evidence that a scheme provided the minimum level of benefits defined in legislation. This remained the position until 6 April 2016 when contracting out was abolished. 

During that period, if a pension scheme’s governing rules were amended to alter members’ “rights to the payment of pensions and accrued rights”, an actuarial confirmation was required. The relevant provisions were set out in section 37 of the Pensions Schemes Act 1993 (Section 37) and Regulation 42 of the Occupational Pension Schemes (Contracting Out) Regulations 1996 (Regulation 42). 

High Court decision

Until the High Court’s decision in Virgin Media v NTL, there was uncertainty regarding the validity of any relevant amendment if Section 37 confirmation was not obtained.

The High Court determined:

• An amendment to a contracted out pension scheme is void, unless an actuarial confirmation was provided for that amendment.
• This applies to amendments to both: (a) past pension savings (pension benefits already earned); and (b) future pension savings (pension benefits yet to be earned).
• The requirement for an actuarial confirmation relates to all amendments, regardless of whether or not they have an adverse effect on members’ relevant rights.

The decision was appealed, which left the pensions industry effectively in limbo until the appeal judgment was delivered in July 2024.

Court of Appeal’s decision

The only issue on appeal was whether Section 37 and Regulation 42 required an actuary’s confirmation only if an alteration to the scheme rules affected pension benefits attributable to past service, or also where the alteration affected pension benefits that a member would earn by future service? 

The employer in Virgin Media contended that no actuarial certificate was required as the relevant amendments were to future rights. This argument was rejected. 

In reaching its decision the Appeal Court first considered the context of the legislation, before seeking to construe the specific words in Regulation 42. 

The purpose of the legislative provisions (and those which preceded them) was to ensure that if a scheme contracted out of the additional state pension, the scheme would provide members with the intended benefits. It was noted that there was nothing in the language used, including historically, which confined the legislation to amendments affecting past service rights. Rather, the focus was forward looking - ensuring a scheme continued to satisfy the “reference scheme test”, ie continued to provide benefits equivalent or better than the legislative notional scheme. 

It's also common for scheme governing documents to include their own provisions restricting amendments to past service benefits and, from 6 April 1997, there was also statutory protection in the form of section 67 of the Pensions Act 1995. It was accordingly far more likely that employers would seek to reduce the value of future, rather than past, benefits.  

The definition of the rights requiring actuarial confirmation were not confined to past service rights. “Rights” was a very general word which took its meaning from its context. It was a natural use of language to understand these to refer to rights whether already earned or yet to be earned.   

Virgin Media’s appeal accordingly failed. The Court of Appeal has confirmed that actuarial confirmation is required irrespective of whether the relevant amendment impacts past or future rights.  In the absence of an actuarial confirmation the amendment will be void. 

Implications

There isn't expected to be any further appeal to the Supreme Court. Legislative change to counteract the implications of this decision also seems unlikely. Pension schemes are, therefore, left with the possibility that historic amendments were not validly made, if actuarial confirmations were not obtained. 

The decision potentially affected defined benefit pension schemes which were contracted out of the additional state pension between 6 April 1997 and 6 April 2016. The implications for those schemes could be very significant indeed. Historic amendments could be of no effect such that schemes have been administered, and members paid benefits, on the incorrect basis. For example, in Virgin Media it was estimated that the additional cost to the scheme if the amendments were void would be £10 million. 

Pension trustees have a duty to ensure members are paid the correct benefits. They are now likely to be urgently reviewing historic scheme documents to ensure that any necessary actuarial confirmations were obtained, particularly where changes were made to reduce members’ benefits. Inevitably in some cases, confirmations will be missing, or the form of the confirmation may create doubt as to whether it is sufficient to comply with section 37. 

The Virgin Media decisions don't address the required form of an actuarial confirmation. It does not, however, appear that a formal certificate is necessary. There does need to be some form of written confirmation that the scheme actuary was satisfied that the “reference scheme test” was met. It remains to be seen whether, in time, the Court is asked to consider whether particular forms of evidence of actuarial confirmations, such as emails, trustee minutes or later actuarial reports, are sufficient evidence that Section 37 requirements were met. 

Where pension schemes cannot find actuarial confirmations for historic amendments, they may look to their professional advisors at the relevant time to cover the cost of any additional liabilities. As is evident from Virgin Media, the extent of those liabilities may be substantial.