When looking ahead at pensions cases expected to be heard in 2024, there are scheduled to be some key cases concerning pension scheme amendments. In particular, the validity of past pension scheme changes, which can have a huge impact on the true liabilities of the scheme and the employer and the underlying entitlements of the employees. Here, we look at a couple of important current cases.
There are many circumstances in which a sponsoring employer will wish to make changes to their occupational pension arrangements. This will often require an amendment to the trust deed and/or rules which govern the pension scheme. Where the amendment is not effected properly, it could mean that changes which were thought to have been implemented many years ago, are actually invalid.
For a scheme amendment to be valid, it needs to comply with two principal elements:
- The amendment needs to be made in accordance with the power of amendment written in the trust deed and rules, this will set out the role of the employer and the trustees in making the amendment, and how exactly the amendment is to be made. It may also stipulate conditions or limitations on how the power can be used. These are known as fetters
- The amendment needs to comply with overriding legislation, for example section 67 of the Pensions Act 1995.
Virgin Media Ltd v NTI Pensions Trustees II Ltd
The ruling in this case created shockwaves amongst pensions professionals last summer when the judge adopted a literal interpretation of what the statutory requirements were under the combined effect of section 37 of the Pension Schemes Act 1993 and regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996.
The exact meaning of the statutory requirements in these circumstances has been debated and disputed for some time but for defined benefit schemes that have contracted-out between 6 April 1997 and 5 April 2016 (when contracting out ended) the judge in the Virgin Media case ruled that amendments to scheme rules must have had actuarial confirmation in writing or they would be void. Such written actuarial confirmation was unable to be produced in this case. This clearly could have massive potential implications for trustees and sponsoring employers of contracted-out defined benefit schemes.
Permission to appeal the decision has been given and the appeal date has been fixed for 25 June 2024. In my view, it would be prudent to consider the decision and start checking that all deeds of amendment between 6 April 1997 and 5 April 2016 contain the necessary evidence of actuarial confirmation, but employers and trustees may wish to wait and see how the appeal proceeds and if there is any DWP regulation on the matter before taking definitive action. If, however, the scheme is approaching buy-out then it may be necessary to complete a thorough review exercise sooner. This is also the case for any such schemes who may be involved in a corporate transaction involving the sponsoring employer given the potential for the buyer to be acquiring higher scheme liabilities than currently thought in the event of a void amendment.
British Broadcasting Corporation v BBC Pension Trust Ltd
Also in June 2024, the Court of Appeal is scheduled to hear an appeal by the BBC following the High Court’s ruling last year regarding restrictions on the ability to amend the provisions of the BBC’s scheme rules. In that case, the court held that the conditions of the exercise of the power of amendment also applied to any changes to future service benefits as well as changes to accrued benefits. The impact of this decision is limited to the particular restrictions contained in the BBC scheme rules, and it is a while since we have seen such a restrictive interpretation of a power of amendment in the courts. It is, however, a reminder to carefully examine any fetters on the power of amendment and understand any risks that a historic scheme amendment may not be effective or only be partially effective, particularly with changes such as employee benefit changes or closure to further accrual.
Towards the end of the year, the High Court is expected to hear a Part 8 application from the trustee in Verity Trustees Ltd v Wood asking for directions on the interpretation of a fetter in the power of amendment and the consequent effect that this would have on amendments made to the rules of the scheme.
We are also expecting judgement to be handed down on Newell Trustees Ltd v Newell Rubbermaid UK Services Ltd and Ian Lawrence Putland following a Part 8 claim from the scheme trustee for a determination of the effectiveness of certain scheme amendments made in the past, as well potential discrimination issues.
What are the consequences of getting it wrong? If a scheme amendment is deemed to be invalid, then the change that it purported to make in the past will not have been made. A costly example can be found in Briggs and others v Gleeds and others. In this case, over 30 deeds for the pension scheme were held to be invalid because they had not been properly executed. One of the purported amendments made by one of those deeds was the cessation of future accrual of benefits for the members. The invalidity of this purported amendment had the result that accrual of benefits had continued and this increased the liabilities of the scheme by around £45 million.
I have had my own experience of uncovering an invalid scheme closure and cessation of accrual. In this instance the very original power of amendment contained a Courage restriction, however this had not been correctly replicated in a subsequent replacement trust deed and rules, the power of amendment was then (invalidly) switched from the trustees to the sponsoring employer and the Courage restriction vanished. It was only through carefully checking each deed back through more than 50 years that I discovered the problem.
The Virgin Media case will have undoubtedly perturbed many defined benefit contracted-out schemes who will most likely have made scheme amendments during the relevant window. It is probably one of the most impactful decisions of 2023 for pensions and it would be welcomed for the appeal to provide greater clarity so that schemes can assess the full impact of the decision on their own historic scheme amendments.
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