Blood on the tracks The Virgin Media case and public policy

I am, as most of my readers will know, a recovering pension lawyer. Most of the time I’m able to keep on the straight and narrow, but occasionally a tempting legal odour wafts under my nose. It can be hard to resist.

The Virgin Media case was one such occasion. A pure technical point of law? Inject that stuff into my veins.

I will resist. In truth, the technical point of law is far less important than its potential consequences. For those consequences are severe.

But first, let’s sniff (but not inhale) the law. The case concerned schemes contracted out on the reference scheme test. Section 37 of the Pension Schemes Act 1993 provides that :

"37 Alteration of rules of contracted-out schemes

(1) Except in prescribed circumstances, the rules of a contracted-out scheme cannot be altered unless the alteration is of a prescribed description.

(2) Regulations made by virtue of subsection (1) may operate so as to validate with retrospective effect any alteration of the rules which would otherwise be void under this section.”

The Regulations in force in 1997 provided:

“The rules of a salary-related contracted-out scheme cannot be altered in relation to any section 9(2B) rights under the scheme unless—

(a) the trustees of the scheme have informed the actuary in writing of the proposed alteration,

(b) the actuary has considered the proposed alteration and has confirmed to the trustees in writing that he is satisfied that the scheme would continue to satisfy the statutory standard in accordance with section 12A of the 1993 Act if the alteration were made, and

(c) the alteration does not otherwise prevent the scheme from satisfying the conditions of section 9(2B) of that Act.”

Despite these clear words, for many years after 1997 many contracted-out schemes amended their documentation without obtaining formal actuarial confirmations. With the benefit of hindsight (regardless of the legal arguments that might be – and were – made), it’s hard to see why. Convenience, I suppose. It’s looking a lot less convenient now.

The reckoning came when Virgin Media sought to establish whether its scheme had been validly amended in 1999 despite an inability to locate an actuarial certificate relating to the relevant deed. When a High Court judge, not particularly familiar with pensions, looked at it, she firmly concluded that it had not.

At this point you didn’t have to be a weatherman to know which way the wind was blowing. But Virgin Media, in hope, appealed to the Court of Appeal on the narrower point whether a certificate was required for amendments to future service benefits. The Court of Appeal, with two judges who had in their earlier careers been stars of the pensions bar, equally firmly rejected the appeal. The High Court judge’s decision was described as impressive.

At this point you might expect me to lament the injustice wrought on pension lawyers by this case. Meeks is going electric: I do not. The risk was obvious, even if you took a different view of the law, and it was avoidable. It should have been avoided.

Yes, yes, but what should happen now? Here we move from law to public policy. And if nothing is done, a hard rain is going to fall.

If nothing happens, pension schemes are going to need to decide whether to do an archaeological investigation. That decision will depend on the views of trustees, the advice of their lawyers, the pressure put on trustees by auditors and potentially the desire to undertake flashier activities like buy-ins, where the insurer may well have firm views on the subject.

Let’s assume the trustees start scraping the ancient midden with their trowels, as many will need to. A string of questions present themselves. Do deeds have certificates? Did those deeds need certificates? If they didn’t have certificates, is there any evidence that the actuary was consulted and expressed a view that might be construed as a confirmation? If the deeds are invalid, what does that mean in practice?

Records are going to need to be unearthed. Miserable juniors are going to need to sift through them. The evidence found will need to be analysed and weighed. The implications will need to be worked through. Schemes will get off more or less lightly, often more or less by chance. Correspondingly, members will get a windfall, more or less by chance. It’s not as though any of the members had any idea that the technicalities hadn’t been properly followed. And if they could have been properly followed, why should the members benefit from a screw-up behind the scenes?

More importantly than any of these things, however, time will be consumed.

Don’t get me wrong. I keenly remember the trauma of wading through unending piles of Hays boxes (only young lawyers really understand the harrowing nature of Frodo and Sam’s quest across Mordor). But the happiness of assistant solicitors is far less important than the gumming up of all pension scheme activity on an inherently worthless endeavour. Even the arbitrary windfall that some members might receive is not necessarily a reason to intervene from government’s perspective: they might well see that as a “you” problem not a “me” problem. But the danger that pension schemes might be too preoccupied to deal with the government’s agenda is a different story.

For the new government has big plans for pension schemes. It is pursuing and extending the Mansion House agenda for productive investment. It is looking at the consolidation of pension schemes. It is looking to co-opt pension schemes into its green policies. If it wants pension schemes to have the time to devote to those plans, it is going to need to help them clear the decks.

On this front, it has the power to assist. It already has the statutory power (as noted above) to make regulations to validate with retrospective effect alterations of the rules which would otherwise be void under section 37 of the Pension Schemes Act 1993.

So the government has a choice. It can let events play out, with the almost inevitable consequence that many pension schemes will be too preoccupied to engage with its agenda. Or it can clear up the mess using a power it possesses and give pension schemes back the time to work on the projects the government is anxious to press on with. The decision looks obvious to me. Let’s hope the minister sees it the same way.