The High Court ruling, given in the 2023 ‘Virgin Media’ case, called into question the validity of alterations made to defined benefit pension schemes contracted-out of the State Earnings-Related Pension Scheme (SERPS) on a ‘reference scheme’ basis between 1997 and 2016. Such alterations required an actuarial confirmation that, after the alteration was made, the Scheme would continue to satisfy the ‘statutory standard’. This would be achieved by providing benefits that were broadly equivalent to, or better than, the pensions that would have been provided under a ‘reference scheme’. The ruling was that, in the absence of such actuarial confirmation, past alterations may be void. This decision created great uncertainty across the pensions industry. Many pension schemes were unable to trace evidence of past actuarial confirmation for historic rule alterations, potentially making them invalid.
Pension Schemes Bill
Following representations from the pensions industry, the Government agreed to resolve this uncertainty by including provisions for such cases within the current Pension Schemes Bill (expected to become law in mid-2026). The process is as follows:
- The scheme trustees request the current Scheme Actuary to consider whether a past rule alteration, which did not receive actuarial confirmation as detailed above, would have prevented the scheme from continuing to meet the reference scheme test.
- If the Scheme Actuary advises that, in their opinion, it is reasonable to conclude that the alteration would not have prevented the scheme from continuing to satisfy the statutory standard, then this alteration is now validated.
Technical actuarial guidance
The Financial Reporting Council (FRC), in conjunction with the Institute and Faculty of Actuaries, has now issued helpful and pragmatic guidance to Scheme Actuaries on providing retrospective actuarial confirmation:
- The Scheme Actuary is not required to have absolute certainty, and professional judgment can be exercised. This is because the legislation only requires the Scheme Actuary to decide that it’s ‘reasonable to conclude’ that the alteration would not have prevented the scheme from continuing to satisfy the statutory standard.
- The Scheme Actuary should assume that the scheme met the statutory standard immediately before the alteration was made, and so only has to consider whether the rule alteration itself would have affected meeting the statutory standard, and not any other changes.
- The guidance encourages taking a proportionate approach, including exercising judgment over what information is sufficient in order to provide the confirmation. It expects that full individual membership data won’t be needed in the majority of cases.
Cases where no further information is needed
In some cases, all that will be required is an understanding of the rule alteration alone. Examples include:
- increases in benefits
- changes that are not connected to meeting the reference scheme test
- increases to pensions in deferment or payment, which simply reflect corresponding changes in legislation.
Cases where further information is required
The guidance encourages Scheme Actuaries to take a pragmatic approach, asking them to take into account information that offers indirect evidence to help them judge retrospective confirmation. Indirect evidence is much more likely to be available than historic membership data and can include information such as:
- trustee meeting minutes
- triennial and other reference scheme test certificates (given after the effective date of the rule alteration)
- valuation reports produced at a later date (as long as these include information about the rule alteration or about meeting the reference scheme test).
For some schemes, an issue can arise from differences between the definition of pensionable earnings used by the scheme and those required by the reference scheme test. Instead of obtaining historical individual membership data, using general information about average salary levels, pay bands and variable pay across the scheme membership may suffice. In some cases, this could be supplemented by obtaining employer confirmation of historic remuneration patterns.
Inability to provide retrospective confirmation
If the Scheme Actuary is unable to provide the confirmation required by the trustees, they are then encouraged to give the trustees details of their investigation, the analyses undertaken and details of any additional information which, if available, might help them to revise their view.
Comment
The guidance may still need further updates if the relevant provisions of the Pension Schemes Bill are amended during its passage through Parliament. However, it’s still very helpful in encouraging Scheme Actuaries to adopt a proportionate and pragmatic approach by using indirect evidence in the consideration of retrospective confirmation. As a result, we expect that providing this confirmation will be straightforward in the majority of cases.
If you would like to discuss any of these matters further, please get in touch with your usual contact at Cartwright.
