The recent Court of Appeal decision in the case of Virgin Media Ltd v. NTL Pension Trustees II Ltd has potentially significant implications for defined benefit pension schemes that were contracted out of the state pension scheme at any time between 1997 and 2016.

According to the decision, any amendments to scheme benefits made during that period will be void unless the scheme actuary had confirmed, when the amendment was made, that the pension scheme would continue to satisfy the statutory standard for contracted-out schemes. Because of the wide-ranging impact of the judgment, the Department for Work and Pensions has been asked to consider bringing forward legislation to validate amendments that might otherwise be void. Meanwhile, however, trustees and employers will need to decide whether they should act now to establish whether any previous amendments are affected.

The Court of Appeal's decision

The case arose from amendments made to the NTL Pension Scheme where challenge was raised by NTL Pension Trustees that the amendments were made without the confirmation required under the contracting-out legislation.

The relevant legislation is section 37 of the Pension Schemes Act 1993 and Regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996 (Regulation 42). The court at first instance considered "section 9(2B) rights" under the Pension Schemes Act 1993, being salary-related rights in occupational pension schemes in respect of contracted-out service. It ruled that any amendment affecting such rights required the actuary's confirmation, without which the amendment would be void.

The issue for the Court of Appeal was whether an actuary's confirmation was required only if the amendment to pension scheme rules affected benefits for past service, or whether the actuary's confirmation was also required if the amendment affected future service benefits.

The Court concluded that the appeal brought by Virgin Media should be dismissed, upholding the decision of Mrs Justice Bacon in the High Court that the words "section 9(2B) rights" as used in Regulation 42 at the relevant time included both past service rights and future service rights.

The court's interpretation was guided by the purpose of the legislation, which was to ensure that members of contracted-out pension schemes receive the benefits that such schemes commit to provide in return for being able to contract out – that is, benefits that are at least broadly equivalent to SERPS pensions. The court did not find any intention in the legislation or the pre-legislative material to restrict the scope of Regulation 42 to amendments affecting past service rights only.

The court also considered and rejected various other arguments, and specifically acknowledged that, had the issue of actuarial confirmation been addressed at the time at which the amendments were made, the actuary could have given the confirmation needed.

Impact of the decision

The decision in the Virgin Media case is consistent with a theme seen in other cases, which have reinforced the fundamental importance of compliance with rules and processes in relation to pension scheme documentation. However, unlike many of those cases which have impacted only the respective schemes involved, the Virgin Media decision has potential ramifications across the industry.

Following the decision in Virgin v. NTL, the Association of Consulting Actuaries, the Association of Pension Lawyers and the Society of Pension Professionals published a joint statement about the potential impact of the ruling. Those three organisations have also formed a working group which has asked the Department for Work and Pensions to consider making regulations under section 37(2) of the Pension Schemes Act 1993 to "remove this uncertainty by validating retrospectively any amendment that is held to be void solely because a written actuarial confirmation was not received before the amendment was made (or where such a confirmation cannot now be located)".

It remains to be seen whether the government will take steps to implement what has been requested, or indeed any other solution, and, if so, when that might happen. Meanwhile, trustees and sponsoring employers of schemes which are potentially affected ought at least to consider whether there are any actions that they should be taking in the context of their particular scheme at this stage. The appropriate decision will vary from scheme to scheme, but all affected schemes will need to ensure that they and their advisers keep a watching brief on developments in this area.