Salary-related pension schemes: Court of Appeal hands down landmark decision in the Virgin Media case

In a highly significant decision for the pensions industry, the Court of Appeal has upheld the High Court’s controversial decision in the Virgin Media case*. It seems likely that this will now be the end of the appeal process.

This confirmation of the High Court’s decision is disappointing and has wide impact, because it puts into question the validity of the amendments made to large numbers of salary-related pension schemes throughout the period between April 1997 and April 2016.

The potential consequences of this decision, absent government intervention, are considerable. For many schemes this will give rise to further uncertainty about the validity of rule amendments, including the possibility of substantial additional scheme liabilities being identified. That could lead to further clarification being sought from the Courts and, potentially also, to knock-on claims being made against the professionals who advised on the making of the relevant scheme amendments. 

How wide is the scope of Virgin Media?

Virgin Media addresses the meaning of legislation which applied to all salary-related schemes which were “contracted out” of the state second pension (as explained further below) during the relevant period. 

This means that Virgin Media has very wide application to salary-related schemes, given that most such schemes were in fact “contracted out” at the time in question.

Statutory background to Virgin Media

Before April 2016, salary-related pension schemes could “contract out” of the state second pension regime (or “SERPS” as its previous iteration was called). If so, members and the scheme employer benefited from a lower rate of National Insurance contributions but, in return, the scheme was required to provide a minimum level of benefits for members in place of the state second pension. 

From April 1997 onwards (until the abolition of contracting-out in April 2016), that minimum level of benefits had to be at least as good as a minimum standard known as the "reference scheme test". The categories of benefits falling within that test are known in the industry as "section 9(2B) rights" after the relevant provision of the Pension Schemes Act 1993. Because Section 9(2B) rights only cover the minimum standard and thus are a low bar, the vast majority of salary-related schemes provide overall benefits in excess of the minimum standard. It was therefore unlikely that amendments to benefits would cause schemes to fall below the minimum standard.

The relevant legislation nonetheless recognised the possible risk that, having originally complied with the reference scheme test, schemes might then be amended (i.e. by reducing members’ benefits) such that they would no longer meet the reference scheme test. In order to prevent that happening, the legislation required trustees to obtain written confirmation from the scheme actuary (known as a “Section 37 Confirmation”) that the scheme would continue to meet the reference scheme test following the amendment of any section 9(2B) rights^**. 

For many years there has been uncertainty about what impact a failure to obtain a Section 37 Confirmation has on a rule amendment. Although it is well known that this issue affects many schemes, the Virgin Media case is the first time that the question has been decided in a court.

What did the Court decide in Virgin Media?

The High Court ruling in Virgin Media potentially undermines the validity of any amendments to contracted-out salary-related schemes made between 6 April 1997 and 5 April 2016. 

That is, essentially, because the judge decided:

• that the effect of Section 37 was to render invalid and void any amendment to the rules of a contracted-out scheme if the amendment was introduced without a Section 37 Confirmation;
• that a Section 37 Confirmation was required in relation to any amendment of section 9(2B) rights, whether those rights were built up by members either before or after the date of the amendment in question; and
• that the absence of a Section 37 Confirmation would render the relevant amendment invalid and void, even if the amendment in question did not in fact adversely affect any section 9(2B) rights.

The scheme’s employer appealed the High Court decision, but only the second of the above three points. The Court of Appeal dismissed the appeal, holding that, in the absence of Section 37 Confirmations, amendments would be invalid whether they related to benefits accrued before or after the date of the amendments themselves. The Court of Appeal also took the opportunity to endorse fully the “impressive” judgment of the High Court judge.

Matters not decided in Virgin Media

By way of minor upside for the industry, the Court of Appeal did at least however leave some leeway regarding the practical application of its ruling in other contexts. In particular, it was not asked to, and did not, give any guidance on what evidence might be enough to show that a Section 37 Confirmation was in fact received. That is an important supplementary issue, given that the legislation only requires that the scheme actuary has “confirmed [statutory compliance] to the trustees in writing”, but does not prescribe any form for the giving of that confirmation.

There may well therefore be situations in which valid Section 37 Confirmations were given as part of more general advice and consultations with actuaries, including by email, and (even if no definitive Section 37 Confirmation can now be traced) there are also open questions about what evidence would be sufficient to establish that Section 37 Confirmation was given at the relevant time (such as correspondence requesting confirmation from actuaries, draft certificates prepared by actuaries, and recitals to deeds stating that Section 37 Confirmation was obtained).

A further, related point arises from the fact that the legislation also required scheme actuaries to recertify, every three years, that a scheme remained compliant with the contracting-out regulations. There is accordingly a possible argument that previously invalid amendments could at least have become valid as from the date of the following actuarial recertification. That argument was not put before the Court in Virgin Media but, as noted in the Court of Appeal’s judgment, “has been reserved for future argument if necessary”.

Implications of the Court of Appeal’s decision

It seems unlikely, particularly given the definitive nature of the Court of Appeal’s ruling and the strength of the tribunal which heard the appeal, that this decision will be appealed to the Supreme Court. It is therefore likely that the Court of Appeal’s judgment has definitively stated the law on these issues. 

If so, that has the potential to cause problems for a large number of salary-related schemes, given that, as already noted, many schemes are likely to be missing the necessary documentation (regarding Section 37 Confirmations) in relation to at least one or two relevant amendments, thereby giving rise to (potentially very large) extra scheme liabilities, as well as possible knock-on complications regarding subsequent amendments and subsequent scheme administration.

This is clearly an unsatisfactory situation, not least because it could result in huge uncertainty and remedial costs for salary-related schemes, even in situations in which the relevant amendments did satisfy the reference scheme test (or even indeed should actually have had the effect of improving members’ benefits) - but are rendered invalid because of a failure to obtain compliant Section 37 Confirmations. Furthermore, this could happen even in situations in which the requisite Section 37 Confirmations were originally obtained, but can no longer be traced, many years later.

For these reasons, the industry has already called on the Department for Work and Pensions (“DWP”) and its Secretary of State to exercise their power to make regulations to validate changes retrospectively in appropriate circumstances. To date, the DWP has declined to do so. 

It is however likely that, in the light of the Court of Appeal’s decision, the DWP will give serious further consideration to this, and will be strongly encouraged to do so by key stakeholders such as industry bodies (including the Society of Pension Professionals, the Association of Consulting Actuaries and the Association of Pension Lawyers) and by the Pension Protection Fund. There is a precedent for remedial legislation of this type being brought in, and the DWP has statutory power do to so, but it remains to be seen whether the government will in fact be persuaded to introduce such legislation in the present case.

In the meantime, the industry is still digesting the implications of the Court of Appeal’s decision and leading practitioners are so far suggesting a tentative approach, depending on the specific circumstances of individual schemes. 

Overall, however (even if the DWP does intervene, and especially if it does not) the Court of Appeal’s decision is likely to give rise to the need for further investigations of scheme documents by trustees and their advisers and, in many cases, to result in complications and additional scheme liabilities arising from the identification of invalid rule amendments. That is likely, in turn, to lead to further claims being made against the professionals who advised in relation to the making of the amendments and, in time, to clearer authority about the duties and responsibilities, in the Section 37 context, of the various categories of professionals providing such advice.

* Virgin Media Ltd v NTL Pension Trustees II Ltd & Ors [2024] EWCA Civ 843 (25 July 2024). The High Court and Court of Appeal judgments are referred to in this note, collectively, as "Virgin Media".

^**See section 37 of the Pension Schemes Act 1993 (“Section 37”), and regulation 42 of the Occupational Pension Schemes (Contracting-out) Regulations 1996.

The views in this note are intended for general information purposes only, and should not be used as a substitute for professional advice. Clyde & Co LLP and the authors are not responsible for any direct or indirect result arising from any reliance placed on the content of this note and exclude liability to the fullest extent possible. Always seek appropriate legal advice before taking or avoiding any action.  If you have any questions, please do not hesitate to get in touch.