Pensions Essentials - June 2025

Section 37 Pension Schemes Act 1993 provides that a scheme with salary-related contracted-out benefits can only be amended if prescribed conditions are complied with, otherwise the amendment will be void. The conditions in relation to amending DB contracted-out benefits accrued between April 1997 and 2016 are set out in regulations and have changed over time. Between April 1997 and April 2013 amendments could not be made to any rights relating to contracted-out employment under the reference scheme test unless the trustees had informed the actuary in writing and the actuary had confirmed in writing that the scheme would continue to satisfy the reference scheme test.  The requirements were changed between 2013 and 2016 to limit the actuarial confirmation requirement to rights accrued after an amendment took effect.  

Last year, the Court of Appeal upheld the decision of the High Court in the Virgin Media case and confirmed that amendments were void if the required actuarial confirmation was not obtained.  This meant that for the purposes of the conditions as they stood between 1997 and 2013, amendments which affected both past and future service benefits were void even where such amendments had been beneficial to members.

This decision has led to consternation amongst some schemes as appropriate actuarial confirmation cannot now be found for all amendments. This in turn has caused difficulties in determining scheme liabilities and has proved a roadblock both to buy-outs and potentially to releasing surplus to employers. 

Section 37 contains a power for the Government to make regulations to “validate with retrospective effect any alteration of the rules which would otherwise be void under this section” and the industry has been engaging with the Government about the possibility of using this power to save amendments where actuarial confirmation cannot be found. 

The Government has issued a press release saying that it “is aware that following last year’s Court of Appeal judgment in Virgin Media… there is increased uncertainty in the pensions industry. We recognise that schemes and sponsoring employers need clarity around scheme liabilities and member benefit levels in order to plan for the future. The Government will therefore introduce legislation to give affected pension schemes the ability to retrospectively obtain written actuarial confirmation that historic benefit changes met the necessary standards.”

This is extremely welcome but how useful it is will of course depend on the precise wording of the regulations and exactly what actuaries are required to certify now.  It may also depend on the availability of historic data.    

Once the legislation is in place, trustees and sponsors will need to consider whether they want to rely on it and whether doing so will give rise to any practical issues. This will need to be done alongside considering the impact of the judgment in the Verity Trustees case that is expected to be handed down in the Autumn. In the meantime, if trustees or sponsors are in the process of finalising their accounts, they may need to consider how to approach Virgin Media issues and should be aware of the various guidance that has been issued in relation to possible approaches.

Finally, it is worth being aware when making scheme amendments now that there are still statutory requirements in relation to  contracted-out benefits, although actuarial confirmation is no longer required. 

Although the bulk of the Act is not yet in force, trustees and sponsors should be aware of it as it contains some changes that may affect the use of member’s personal data. Things to be aware of include:

• As trustees will all be aware, members have rights in relation to their data, including a right to ask what data is held about them via a ‘data subject access request’ (DSAR). The Act includes some helpful amendments to the UK GDPR to codify existing regulatory guidance on DSARs, including by confirming that controllers only need to make a ‘reasonable and proportionate’ search in response to a request.
• The Act introduces a new requirement for controllers to have in place a mechanism to facilitate data subject complaints and to ensure they are acknowledged within 30 days. Trustees should consider whether any existing complaints processes cover this requirement.
• UK GDPR requires personal data to be “collected for specified, explicit and legitimate purposes and not further processed in a manner that is incompatible with those purposes”. Clearly as statutory requirements evolve, the use of member data might also evolve – for example in relation to the pension dashboards. The Act makes some changes to when a new use of personal data should be treated as compatible with the original purpose it was collected for. The changes should not be problematic for trustees where they are reusing personal data to comply with statutory requirements such as the dashboards and should reduce the need for compatibility tests to be carried out and documented in some instances. Trustees should always check if a new use of personal data complies with their data protection obligations and/or requires a refresh of their privacy notices.
• The Act relaxes the rules around automated decision making, enabling greater use of legitimate interests where decisions don’t involve special category data (such as data relating to health and sexual orientation).
• There are changes to the ICO’s enforcement powers, including allowing it to require people to attend interviews (as TPR can) and introducing additional information gathering powers. The Act also increases the maximum fines that can be issued for digital marketing and cookie infringements, to align with those under the UK GDPR (to the higher of 4% annual worldwide turnover or £17.5 million). The Act also relaxes the current UK rules around cookies, to enable more cookies to be placed without user consent.  

It is likely that the changes made by the Act will be introduced by regulations on a staggered basis over the next 12 months. In the meantime, if you would like more detail about how all of this will affect your scheme, the ICO has produced guidance on the changes introduced by the Act which it is worth having a look at. In addition, our data privacy blog, the Lens contains more interesting commentary on the changes.

The case of Renishaw Plc v Ross Trustees is an interesting one which demonstrates the court’s willingness to take a practical approach to the construction of scheme rules, particularly where the consequences of a literal interpretation would lead to “irrationally generous” benefits .

The Scheme was a DB scheme but in 1992 a provision was introduced into the rules to the effect that a member’s DB pension would, “if necessary, be increased so as not to be less than the Member's Pension Account”. Pension Account was defined as twice the contributions paid by the member, adjusted for investment returns. The purpose behind the change was to “make it clear to members that they would be no worse off” continuing to participate in the Scheme as opposed to joining a personal pension scheme as at the time it was thought that DC arrangements might provide better benefits.

The question which the court was asked to consider was whether the DB pension had to be compared to the annual pension that could be purchased from the Pension Account or whether it should be tested against the entire cash value of the Pension Account. The effect of the latter construction would increase deferred and pensioner liabilities from just over £140 million to nearly £1.6 billion.

The judge considered the rules of construction, including:

• Considering the language used and what a reasonable person who has all the background knowledge reasonably available to the parties would have understood them to have meant.
• The court must have regard to all the relevant surrounding circumstances and if there are two possible constructions, the court is entitled to prefer the one which is consistent with business common sense.
• Where it is clear something has gone wrong with the language used and what a reasonable person would have understood the parties to have intended, the court will not bind the parties to a mistake.

Whilst the literal meaning of the DC underpin was arguably that a member’s DB pension should be increased to be equal to the entire value of their notional Pension Account, it was clear that there had been a mistake in the drafting. The parties could not possibly have meant that the underpin should be applied in this way and no reasonable person would assume otherwise. 

If the literal interpretation was adopted, the underpin would cost over 11 times more than the DB benefits and “would not be operating as an 'underpin' at all. Far from 'underpinning' the primary final salary benefits, [it] would effectively be replacing those primary benefits.” There would have been no point in the drafter setting out the DB benefits as the underpin would always be higher. In addition, if the literal approach was adopted, it would not be a DC underpin at all as the pension would be equal to a fixed sum as opposed to the income that could be secured by that sum. This would be wholly inconsistent with the aims of introducing the underpin and would also have exceed Revenue limits.

Having concluded that there was a clear mistake, the judge then had to consider what correction was required to address it. He concluded that what was missing from the underpin “was the conventional money purchase concept that the hypothetical pot represented by the Member's Pension Account should be used to 'purchase' an annual pension.” The “relevant comparator for the Final Salary Pension becomes, not the Member's Pension Account as a cash lump sum but, rather, 'the annual amount of pension that could be purchased with' the Member's Pension Account.” 

The judge reached a sensible decision based on fairly clear evidence as to what the rules should have said and the fact that the alternative would have yielded absurd results. However, it is helpful to know that the courts are prepared to deal with clear mistakes in this way.

Buy-in: A number of members have complained that when their scheme was bought-in in 2023, their ability to take an early unreduced pension from the scheme was removed. The Ombudsman has concluded that he has jurisdiction to determine the complaints and is taking a “lead case” approach to them – which means he is considering one case first and, although it will not bind any parties to act in a particular way in relation to the other complaints, it will set out the Ombudsman’s views in relation to the issue and how he is likely to decide other connected cases.

Few details are available but the suggestion in the pensions press is that the benefit was discretionary and it will be interesting to see what the Ombudsman says about hardcoding discretionary benefits on a buy-in.

Discretionary increases: In a recent determination the Ombudsman considered whether a failure to provide discretionary increases on pre-1997 pension in payment could amount to discrimination.

N was a member of the Scheme between 1965 and 2000, when he retired. The rules provided inflationary increases for pensions that came into payment before 1994 and statutory increases for post 1997 benefits. For pre-1997 benefits that came into payment from 1994, only discretionary and GMP increases were provided. Discretionary increases required the employer’s consent and were provided up to 2011 when it became apparent that the Scheme had a significant deficit. No discretionary increases appear to have been provided after that date.

N complained that the scheme was acting in a discriminatory way as members who took their benefits before 1994 would receive guaranteed increases, whereas members with the same service who took their benefits later would receive only discretionary increases. It was also unfair that he had received no increases for over 10 years.

The Ombudsman said that it was not his role “to consider whether the Rules are fair and reasonable”. The employer and trustees had acted in accordance with the rules.

In relation to whether the discretion not to award increases had been properly exercised, the employer and the trustees had a “duty to ensure that the Scheme is sufficiently funded with enough provisions to provide for the membership as a whole over the coming years”. It was not part of the Ombudsman’s remit “to comment on whether the [employer]… has sufficient financial reserves to pay for any discretionary increases”. He could consider its decision-making process and the correct process was to ask the right questions, correctly apply the rules and legislation, take all relevant factors into account and reach a decision that was not perverse. There was no evidence that the employer had not done this.

N also argued that he had a contractual entitlement to increases as there was a clearly established “custom and practice” of paying them. The Ombudsman said this was not the case as the rules were clear that increases were discretionary and not an entitlement.

The Ombudsman did not specifically address the issue of discrimination, but the adjudicator said that to establish this, N had to show he was being treated less favourably than other members in the same category. Members who retired before 1994 were in a separate category and so N had failed to demonstrate that there was discrimination.

The issue of increases on pre-1997 is one that TPR has looked at as well as the Work and Pensions Committee but so far no action has been taken. Whilst it is easy to see why such members think they are being treated unfairly, in some ways it is slightly difficult to justify paying greater increases to them when DC members have much lower pensions. It does not seem like inter-generational fairness.