The Court of Appeal has dismissed an appeal in the case of Virgin Media Ltd v NTL Pension Trustees II Ltd.
What did the Virgin Media case decide?
The Virgin Media case (Virgin Media Ltd v NTL Pension Trustees II Ltd) concerned the validity of amendments made to pension schemes that were contracted-out of the state pension system in the period from 6 April 1997 until 6 April 2016 (when contracting-out was abolished).
Section 37 of the Pension Schemes Act 1993 provided that the rules of a contracted-out scheme could not be amended unless the amendment was of a type specifically permitted by regulations.
The wording of the relevant regulations was convoluted, but they essentially provided that to make amendments in relation to defined benefit pension rights in respect of post-6 April 1997 service:
(a) the trustees had to inform the actuary in writing of the proposed alteration(s); and
(b) the actuary had to confirm to the trustees in writing that the actuary was satisfied that the scheme would continue to meet the standards for contracting-out if the alteration(s) were made.
This written confirmation from the actuary is frequently referred to as a "section 37 certificate" (although there was no requirement for a certificate – a letter or e-mail containing the required confirmation would have been sufficient).
In the Virgin Media case, the High Court held that a failure to obtain a section 37 certificate when required by legislation will render the amendment void. This is the case even if there would have been no issue with the actuary giving the certificate at the time. An appeal to the Court of Appeal was dismissed on 25 July 2024.
Why is the Virgin Media case significant for pension schemes?
Lots of pension schemes will have made amendments in the period 6 April 1997 to 5 April 2016 for which a section 37 certificate was required. If no such certificate was obtained, that amendment will be void. That could mean that benefits have continued to accrue on the pre-amendment basis. So on a worst case scenario, schemes could potentially have significant additional liabilities that have not been funded for. Legal restrictions on amending accrued rights mean that it will not generally be possible to "correct" this retrospectively.
In some cases a section 37 certificate may have been appended to the deed of amendment, in which case it will be easy to establish that a section 37 certificate was in fact obtained. However, there was no requirement that a section 37 certificate had to be appended to or mentioned in the deed of amendment. So in many cases it may not be obvious whether or not a section 37 certificate was obtained, and files containing relevant information may by now have been destroyed.
Did the Virgin Media judgments say what trustees or employers should do where it is unclear whether a section 37 certificate was obtained?
No. In the Virgin Media case the parties asked the court to give a ruling on the basis that no section 37 certificate had been obtained. This means that neither the High Court nor the Court of Appeal judgment say anything about what trustees or employers should do if the position is unclear.
Could there be further developments in the law?
It's possible. Further developments could occur in the following ways:
- Pensions industry bodies have been lobbying the Government to make regulations to retrospectively validate amendments which are void as a result of a failure to obtain a section 37 certificate. The Government has an existing power to make such regulations, but has not said whether it will do anything.
- Virgin Media could seek permission to appeal to the Supreme Court. However, we currently see this as relatively unlikely.
- Arguments that weren't raised in the Virgin Media case could be brought before the courts via other cases, in particular regarding the legal position where it isn't clear whether a section 37 certificate has been obtained or not. Anecdotally we have heard that a further case raising section 37 issues is expected to come to court next year.
Can schemes and employers adopt a "wait and see" approach?
After the High Court judgment we started to see auditors seeking confirmation from employers that they had investigated whether their pension schemes had any section 37 issues. Prior to the Court of Appeal's judgment, our experience was that auditors generally accepted that it was sensible to await the Court of Appeal judgment before undertaking detailed investigations. Now that we have the Court of Appeal judgment, we think it's likely that auditors will become more insistent that some level of investigation is carried out.
It is also possible that schemes may face claims from members alleging that amendments were invalid because no section 37 certificate was obtained. In any such case, the burden of proof would lie with the member, who would need to prove on the balance of probabilities that no section 37 certificate was obtained.
What should scheme trustees do now?
As a first step, trustees may wish to identify:
- what scheme amendments were made in the relevant period; and
- whether the amending documentation:
- had a section 37 certificate attached;
- did not have a section 37 certificate attached, but did make reference to a section 37 certificate having been obtained or
- makes no reference to section 37.
