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Certain amendments to contracted-out defined benefit schemes may be void – Virgin Media Ltd v NTL Pension Trustees II Ltd & Ors

This case held that certain amendments made to contracted-out benefits of occupational defined benefit schemes accrued between 1997 and 2016 are void if there was no actuary's confirmation under Section 37 of the Pensions Schemes Act 1993 (PSA93). This case could have potentially far-reaching implications.

This case concerned so-called "section 9(2B) rights". These were accrued after April 1997 and were, in effect, designed to be the successor to Guaranteed Minimum Pensions. For contracted-out pension schemes, these were a way of providing benefits out of the scheme in place of the State Second Pension, and instead of through national insurance contributions. The contracted-out regime came to an end in April 2016. Section 9(2B) rights were, therefore, accrued between 1997 and 2016 and were subject to certain protections. There is a provision in the PSA93 which required that alterations to these types of benefits were to be accompanied by a confirmation by the scheme actuary (i.e. a s37 certificate) that, if the alteration was made, the scheme would continue to satisfy the "reference scheme test". Such changes could include, for example, changes to the rate such benefits were accrued.

The court held that:

1. Section 37 PSA93 would render an amendment to rules of a contracted-out scheme which relate to section 9(2B) rights void if the change was made without a s37 certificate

2. Both past and future services rights are caught by the legislation

3. Voidness applies to all alterations to section 9(2B) rights and not merely those that would or might adversely affect such rights.

This would mean that, even if the attempted change itself was otherwise unproblematic, the absence of a s37 certificate would render the attempted change invalid, at least until a later change was made with a s37 certificate. The Court has not yet ruled in detail on where this judgment leaves the scheme in question; we understand a 'consequentials' hearing is due to be listed. It is hoped that the consequentials hearing may provide answers to some questions left unanswered by the judgment.

Extending the scope of the PPF

It has been widely reported that the Government is considering extending the scope of the Pension Protection Fund (the PPF) to become a consolidation vehicle for "small, poorer performing DB schemes" – i.e. those with sponsoring employers who are financially stressed but which have not yet failed in a way that makes the scheme eligible for PPF assessment.

What we know, or at least expect, so far is that entry would be on a voluntary basis; once accepted by the PPF the sponsoring employer(s) would no longer have any liability for the pension scheme, and the trustees would also cease to have a role; the PPF would take control of the scheme's assets, and would become responsible in full for its liabilities.

The Spring Budget 2023 – impact on pension scheme members

The main changes affecting pension scheme members are:

• the standard annual allowance will rise from £40,000 to £60,000;

• the minimum tapered Annual Allowance (which applies to earners with taxable income over £240,000 (rising to £260,000)) and the Money Purchase Annual Allowance (which restricts the tax relief available once a person has accessed his or her pension savings) will both increase from £4,000 to £10,000; and

• the tax charge for exceeding the standard lifetime allowance will be removed.
  

Changes to the Lifetime Allowance

Following the changes to the LTA regime effective from 6 April 2023, we have some more clarity on how these changes will operate in practice. There are three areas in particular which are impacted by the changes:

• Accrual for persons with protection – individuals with enhanced or fixed protection in place on 15 March 2023 can recommence pension accrual should they wish without jeopardising their protection;

• Continuing need for protections – Despite the removal of the LTA tax charge on excess savings over the LTA, enhanced and fixed protections remain valuable because of the access these protections give to increased tax-free lump sums; and

• Tax charges on lump sums – testing against the LTA for serious ill-health lump sums or a defined benefit lump sum remains necessary. The value of such payments in excess of the LTA will be subject to income tax at the recipient's marginal rate.
  

Pension schemes and LDI

The Bank of England has given clear indications that it wanted increased regulation over the use for LDI by pension schemes. In its Financial Policy Summary and Record, the Bank of England's FPC re-iterated that there is an urgent need for non-bank financial institutions to have more resilience. In particular, LDI funds need to be able to withstand severe plausible stresses in the gilt market. As a result, the FPC recommended that the Regulator takes action as soon as possible to mitigate financial stability risks by specifying the minimum levels of resilience for LDI funds in which pension scheme trustees can invest. LDI funds should be resilient to a yield shock of 250 basis points at a minimum as well as the resilience required to manage other risks and day-to day movements in yields.

On the back of the FPC's statement, the Regulator has now issued guidance on practical steps trustees should be taking to manage risks when using leveraged LDI (that is, LDI that requires collateral to be provided to counterparties as security).

The Regulator reminds trustees that the investment of scheme assets remains ultimately the responsibility of the pension scheme trustees. Trustees must ensure they have robust processes in place to ensure their scheme is resilient to market shocks. There are four main areas trustees need to consider:

• Investment strategy – trustees should review their investment strategy on a regular basis as well as where there have been significant changes to the scheme's circumstances or market conditions. Trustees should consider the advantages and disadvantages of LDI in the wider context of the scheme. Whilst LDI is useful for managing volatile funding deficits, trustees must be aware that it will require the scheme to maintain a certain level of liquidity to meet collateral calls

• Collateral resilience – trustees should ensure that any LDI arrangements they are invested in are resilient to short-term adverse market changes. The Regulator notes that in addition to the operational buffer operated by the LDI fund, an LDI arrangement should also have a market stress buffer of at least 250 bps

• Governance – trustees need to understand the role and responsibilities of their advisers in respect of LDI and ensure that the level of delegation and monitoring is appropriate and set out clearly in service contracts

• Monitoring – trustees should also ensure processes are in place for monitoring the resilience of the LDI arrangement.
  

The Regulator issues guidance on improving equality, diversity and inclusion (EDI) amongst trustees

The Regulator has issued guidance to trustees and employers to improve EDI in the appointment of trustees.

The Regulator recommends that:

• trustees keep up to date with training on EDI;

• trustees develop and maintain an EDI policy covering an agreed definition of EDI, the EDI aims of the trustees and an EDI training plan;

• the chair of trustees should play a key role in promoting EDI;

• any performance assessment of the trustees or advisory firms should include how well EDI is and continues to be embedded into processes;

• the trustees should set out EDI objectives and goals at the start of the scheme year;

• trustees should review how they consider EDI is being embedded into meetings;

• when employers are appointing trustees, they should consider widening the pool of candidates to include those outside of senior management positions;

• diversity amongst the trustees should be reviewed and any gaps identified;

• an inclusive culture amongst the trustees should be encouraged;

• EDI should form a key part of the recruitment process for new trustees and recruitment processes may need to be amended to attract a wider variety of candidates.

The guidance provides examples of methods that can be employed to attract a greater range of trustees; and when appointing advisers and service providers, trustees should consider how they can promote inclusive discussion and decision making. The Regulator provides a number of questions that trustees can include in tenders for providers and advisers regarding EDI.

Many schemes may be reviewing their policies and appointment processes as part of their general code of practice compliance review. It may therefore be the optimum time to consider EDI and ensure that any policies are updated to take into account the Regulator's expectations in this area.

Trustees urged to engage promptly with the Pensions Regulator where sponsor is in difficulty

The Pensions Regulator (TPR) has set out its expectations for steps that trustees should take if their sponsor is in difficulty. They key message is to involve TPR as soon as possible.