UK Court of Appeal says section 37 confirmations required for future service changes

On 25 July 2024 the Court of Appeal upheld the High Court’s decision in Virgin Media v NTL Pension Trustees. This case confirms that changes to contracted-out salary related schemes made after 6 April 1997 will be void where the trustees failed to obtain written “section 37” confirmation from their scheme’s actuary before the changes were made. The Court of Appeal has confirmed this extends to future (i.e. forward-looking) benefit changes as well as changes affecting benefits already built up.

Eversheds Sutherland acted for the Trustees in the case, which took a neutral stance as to the outcome but needed to know the correct basis on which to administer the scheme’s benefits.

What does this mean for your scheme?

If you are the trustee or sponsor of a scheme that was contracted-out on a salary-related basis between 6 April 1997 and 5 April 2016, there is a risk changes made during this period may be invalid if a section 37 confirmation was not obtained before the change was made.

To establish whether or not this may be relevant for your scheme you will need to review any amendments made during this period which required a section 37 confirmation to see whether the necessary confirmation was obtained.

Background

Up to 6 April 2016, pension schemes could contract-out of the state second pension if they met certain conditions which were set out in the Pension Schemes Act 1993 (PSA 93), regulations and guidance. If a scheme was contracted-out, the employer and members paid lower national insurance contributions. In return, the scheme had to meet certain minimum statutory requirements.

Schemes that contracted-out on a salary-related basis were known as “COSR” schemes. From 6 April 1997, COSR schemes had to provide benefits which met an overall quality standard called the “reference scheme test”. The scheme actuary had to confirm every three years that the scheme continued to meet this test. Members’ contracted-out rights under the reference scheme test were commonly called “section 9(2B) rights” after the relevant section of the PSA 93.

Section 37 of the PSA 93 contained restrictions on the amendments that could be made to contracted-out schemes. These were broadly aimed at ensuring a scheme continued to meet the reference scheme test. The conditions which amendments needed to satisfy changed over time.

This case concerned the requirement that trustees needed to get prior written confirmation from an actuary that, on making an amendment to a COSR scheme affecting members’ section 9(2B) rights, the scheme would continue to meet the reference scheme test. This is known as a section 37 confirmation.

What did the High Court decide?

This case was the first to directly consider the effect of a failure to get a written section 37 confirmation before an amendment was made to members’ section 9(2B) rights under a COSR scheme.

In June 2023, the High Court considered the legislation in force between 6 April 1997 and 5 April 2013, and held that:

1. A failure to obtain a section 37 confirmation before amending members’ section 9(2B) rights meant those changes were void.

2. This applied to all changes to members’ section 9(2B) rights, whether the amendment was a benefit reduction or improvement.

3. This also applied to changes which affected rights attributable to pensionable service both before and after the date of the relevant change. (In April 2013 the wording of regulation 42 was changed to make clear this requirement only applied to future service changes).

For more detail on the High Court’s decision, see our speedbrief on this.

What was the appeal about?

The appeal concerned only point 3 above. While all the parties accepted that changes to benefits built up prior to the date of an amendment would be invalid without a section 37 confirmation, the Court of Appeal was asked to reconsider whether changes to benefits accrued after the date of an amendment would also be void.

In practice, this was the key concern arising from the High Court’s decision, because most changes to pension scheme benefits are forward-looking.

What was the outcome?

The Court of Appeal confirmed the High Court’s decision. It held that forward-looking changes to members’ benefits (i.e. changes to the benefits members would build up after the change was made) under a COSR scheme are void, if the trustees did not get a written section 37 confirmation from the scheme’s actuary before the change was made.

The Court of Appeal’s decision was based on a detailed review of the background to and purpose of the contracting-out regime, and the interpretation of the relevant legislation.

The Court also noted in passing that a section 37 confirmation did not need to be a formal “certificate” from the scheme’s actuary: “all that was required was written confirmation” that the scheme would continue to meet the reference scheme test after the amendment had been made. This means an email or letter from the actuary which provides the relevant confirmation should be sufficient.

What next?

The Court of Appeal’s decision may have very important consequences for some COSR schemes. This is because changes to members’ section 9(2B) rights – going as far back as 1997 – will be void where a written section 37 confirmation was not obtained before the change was made.

This case also raises a number of questions which were not answered by the High Court or the Court of Appeal. Some of these may need to be considered by the Courts in the future.

It is possible the government may take action to ‘fix’ some or all of the issues caused by this judgment, particularly as section 37 includes a power for the DWP to make regulations to retrospectively validate rule amendments that would otherwise be void under that provision. However, this is far from certain. It would be helpful if the DWP could confirm its position as soon as possible, to avoid the pensions industry being left in a state of ‘limbo’.

In the meantime, trustees and sponsors of former COSR schemes should take legal advice on the steps they should take in light of this decision to identify the extent to which it may impact their scheme.