David Hamilton, Chief Actuary at leading independent consultancy Broadstone commented: “The upholding of the original ruling is expected to cause major issues across the defined benefit pensions industry.
“Those hoping this would all blow over on appeal might now need to start rummaging through archive files in search of historic evidence of actuarial confirmations. Meanwhile many will be looking desperately to the DWP to provide a solution that avoids a lot of unexpected and unwelcome rectification exercises.
“It is frustrating that significant amounts of time and money that could be spent more productively will now need to be ploughed into evidencing or justifying historic decisions that all parties (company, trustees and members) were entirely comfortable were made properly.”
A briefing note giving background on the case and its implications (but produced prior to the appeal ruling being released) is attached.
Stewart Hastie, ACA Chair, commenting on the Virgin Media case said: “The consequences of this decision are a real concern with significant ramifications for sponsors and schemes that are unintended and unnecessary. Along with others, ACA is looking to the Government to bring forward clarifying legislation or regulations to help schemes and their sponsors address the situation positively.
“Without clarifying action, we also fear this could add unbearable pressure to scheme administration and member services, on top of existing major projects like GMP equalisation and dashboards implementation.
“The most immediate concern is financial reporting for sponsors that may be forced into recognising material P&L charges that later become unwound and unnecessary.”
Arc Pensions Law senior partner Anna Rogers comments: It makes no sense for rule changes to be invalidated if the benefits were in fact good enough to meet the contracting-out test. This is once again a pensions lottery for scheme members. There will be losers as well as winners if generous terms that were ‘hard coded’ are struck out, or unintended benefits for some mean reduced benefits for others. The effect is unpredictable and irrational. We call on the DWP to intervene swiftly and announce that it will remove the unintended consequences of section 37. The DWP has the power to validate amendments retrospectively and has done it before. We need a modern version of the Validation of Rule Alterations Regulations that were made in 1998.
“Tolerance for risk - legal or otherwise - varies between schemes but uncertainty is a fact of life in pensions, and not just on data. Legal risk is no different from investment, funding or covenant risk in the sense that it’s better to acknowledge it that to ignore it.”
Arc Pensions Law managing partner Kate Payne comments: “It’s a question of fact whether a written section 37 confirmation was given. Amending deeds may attach a copy but that’s not required, and a ‘confirmation’ can take many possible forms. We think what trustees need is evidence rather than proof, to be decided on the balance of probabilities."
Iain McLellan, Director at Isio said: "The ruling could significantly impact sponsors of DB schemes. If any amendments are deemed invalid due to the lack of necessary actuarial confirmation, this could lead to increased balance sheet liabilities for the schemes. This means sponsors might have to recognise higher pension obligations, potentially affecting their balance sheet statements and funding strategies. Schemes may also face legal uncertainty and substantial administrative costs when reviewing and potentially rectifying these amendments – involving extensive legal and actuarial consultations.
“While pension schemes and their advisers will need to address this issue in due course, sponsors will be under more immediate pressure from their auditors to identify and recognise any additional liabilities in their accounts. Lots of schemes had put off looking at this issue in the hope that the appeal would be successful, but the original decision being upheld will mean that they have to start investigating previous rule changes now.
“We anticipate industry lobbying for a statutory override to mitigate potential liabilities arising from this ruling. However, any override, if the government agrees for it to be applied, is likely to take time to finalise. In the interim, sponsors and schemes must navigate the current legal landscape and prepare for potential adjustments to their pension schemes."
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