Pension Schemes Bill seeks fix for Virgin Media fallout

Last year, the Court of Appeal confirmed in the case of Virgin Media Ltd v. NTL Pension Trustees II Ltd [2024] EWCA Civ 843 that, with effect from 6 April 1997 until contracting-out on a defined benefit (DB) basis ended on 6 April 2016, alterations to certain benefits in such schemes (known as “section 9(2B) rights”) could only be made where specific requirements were met (the Requirements). These Requirements included written actuarial confirmation that, if the alteration were made, the pension scheme would continue to provide benefits that were broadly equivalent to, or better than, a notional "reference scheme test" (the s37 Confirmation). The Court of Appeal held that, where these Requirements applied, an amendment made without a s37 Confirmation would be void. 

As the legislation did not require a Section 37 Confirmation to be given in any particular form, this could have been wrapped up as part of written advice given at the relevant time. Importantly though, because of the limited scope of the appeal, the evidence that might be needed to demonstrate a Section 37 Confirmation’s existence wasn’t considered.

The Virgin Media case has proven to be one of the most significant decisions in recent pensions law, with potentially huge implications for DB pension scheme liabilities across the industry. Following the Virgin Media case, a separate case was heard by the High Court earlier this year, which is expected to clarify a number of points, including what elements of pension actually fall within the scope of s37 and what might count as an “alteration” for these purposes. The judgment in this case is still pending at the time of writing.

In the meantime, the Government, recognising “that schemes and sponsoring employers need clarity around scheme liabilities and member benefit levels in order to plan for the future” (and no doubt mindful of the time and money potentially involved in tracking down evidence which could prove inconclusive given the passage of time) has put forward a proposed remedy. This is included in the latest draft of the Pension Schemes Bill (the PSB). The PSB is not expected to receive Royal Assent until early 2026, with the provisions due to come into force two months later.

Proposed remedy

Purported alterations to affected pension scheme benefits will be “potentially remediable” if four main conditions are met. The first condition is that the alteration to benefits could not be made unless the Requirements (as they stood at the time) were met. Secondly, the scheme trustees or managers have treated the amendment as valid. Thirdly, no “positive action” has been taken by the scheme trustees or managers on the basis that they consider the alteration to be of no legal effect due to its non-compliance with the Requirements. Finally, that it is not otherwise excluded from the scope of the proposed remedy.

What is ‘positive action’?

A trustee or manager will be regarded as having taken ‘positive action’ where they have, in essence, notified members in writing that an alteration is void (for non-compliance with the Requirements) and the scheme will be administered on that basis, or taken any other step in relation to the scheme’s administration in consequence of their considering an alteration to be void, which has (or will have) the effect of altering payments to or in respect of scheme members. As currently drafted, simply investigating a scheme’s position, even if potentially invalid amendments are identified, should not fall foul of this exclusion.

Other exclusions

In broad terms, the draft legislation includes other exclusions based on the extent to which questions regarding the validity of an alteration in relation to compliance with the Requirements have been brought before the courts. For example, an alteration will be excluded from the scope of the remedy where such a question has been determined by a court in ‘legal proceedings’ to which the scheme trustees or managers were a party before the new provisions come into force.

As 'legal proceedings' is not defined, this could be interpreted broadly, possibly encompassing professional negligence actions for failure to meet the Requirements and member complaints to the Pensions Ombudsman.

For those pension schemes which adopted a ‘wait and see’ approach our current expectation, based on the draft PSB, is that the ‘positive action’ and ‘other exclusions’ conditions above should not cause an issue.

Conditions which will need to be met

A potentially remediable alteration will be treated as valid if an actuary provides the pension scheme trustees with written confirmation that, in their opinion, it is reasonable to conclude that, on the assumption it was validly made, the historic alteration to benefits would not have prevented the scheme from continuing to satisfy the reference scheme test. The ‘actuary’ here can be the current actuary appointed to the scheme or another actuary appointed solely for this purpose.

The Financial Reporting Council (FRC) has recently announced that it is developing technical guidance to support scheme actuaries in confirming that historic pension scheme amendments met the necessary standards. The FRC will work with industry professionals, the Institute and Faculty of Actuaries and the Association of Consulting Actuaries to develop this guidance and intends for it to be available when the expected legislation comes in force.

Special cases

As a helpful point of detail, the PSB also covers the position for pension schemes that have been wound up before the new measures come into force. The PSB provides that any potentially remediable alteration will be treated as having met the Requirements and, as such, as having always been valid for those purposes. This easement will come as a relief to ex-trustees and employers of historic pension arrangements.

Areas of uncertainty

Whilst further regulations are expected, under the current drafting, some areas of uncertainty remain. As a first step, in order to use the remedy, trustees or managers will need to determine whether any of their scheme’s amendments are ‘potentially remediable’. This may not be straightforward in all cases [(the further High Court case mentioned above may assist with this point to a degree)]. 

Another area of uncertainty is how easy it will be for actuaries to actually provide the required confirmation, nor what information they will need to do so (remember these are amendments which were made as far back as April 1997 in some cases). 

Finally, schemes which took transfers-in could be another difficult area. Where the transferring scheme is still ongoing (so the winding-up special case provision noted above doesn’t apply), the receiving trustees may be dependent on the transferring trustees taking steps to address any potentially remediable alterations. Similar considerations might also arise where a scheme has secured benefits with an insurer but has not yet wound up.