The High Court has ruled that a lack of actuarial confirmation would render relevant amendments to affected contracted-out defined benefit (DB) pension schemes’ rules invalid and void, in a case that could have "far-reaching implications".

Under section 37 of the Pension Schemes Act 1993, the rules of salary-related contracted-out schemes could not be changed in relation to section 9 (2B) rights unless the actuary had supplied written confirmation that the scheme would continue to meet the statutory standards.

Section 9 (2B) rights are attributable to contracted-out service from 6 April 1997, while the statutory standards are a benefits test based on rights under a notional ‘reference scheme’.

However, law firm CMS noted that, until this ruling, there was no case law on which types of amendments needed the actuary’s confirmation and the consequences of failing to comply with the condition in section 37.

Given this, legal experts have argued that the recent High Court ruling in the case of Virgin Media v NTL Pension Trustees II, relating to a scheme trust deed and rules rewrite in 1999, could have "far reaching implications" for schemes that contracted out on the salary-related basis after 1997.

In the ruling, the judge decided that if the required actuarial confirmation was not supplied, the effect of section 37 was to render the amendment invalid and automatically void.

Furthermore, the court ruled that the references in the legislation to section 9 (2B) rights included both past and future service rights.

The judge also ruled that the actuarial confirmation requirement applied to all amendments of relevant contracted-out scheme rules, not just those that could negatively impact section 9 (2B) rights.

CMS suggested that this could extend, possibly significantly, the scope for amendments to be void where there is no actuarial confirmation, arguing that while the industry will need time to digest the full impact of the decision, trustees may wish to review past deeds of amendment to confirm whether the appropriate actuarial certifications were obtained.

Arc Pensions Law senior partner, Anna Rogers, also warned that the judgment could result in "extra benefit cost for sponsors if closure to accrual, changes in index, or caps on increases or salaries are invalid”.

“For members it may mean unexpected windfall benefits, but that’s not all good news because there are potentially winners and losers, with a transfer of value from some members to others," she stated.

“The issues will surely have to be decided by the Court of Appeal in this case or another one unless the Department for Work and Pensions is willing to fix this issue with retrospective correcting regulations.”

Arc Pensions Law partner, Jane Kola, added: “We are still digesting the detail of this case and its consequences, but it seems to be the worst possible interpretation the judge could have reached when it comes to certainty over benefits.

“It could be a hammer blow for schemes looking to secure benefits in the buy-in market, or those who already have. It could undermine the whole basis for the transaction.”

However, CMS pointed out that the requirements under section 37 have changed over the years, explaining that "it does not necessarily follow that a court would reach the same conclusion in every case".

It also pointed out that it is not yet known if the case will be appealed, acknowledging that trustees may be reluctant to take material action whilst there remains the possibility of a successful appeal or parliamentary intervention.

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