Section 37: DWP should step in before the dam breaks

The rejection of the appeal in the Virgin Media v National Transcommunications Limited (NTL) case concerning the application of section 37 of the Pension Schemes Act 1993 will throw the pensions industry into chaos for years unless immediate steps are taken by the DWP to retrospectively revise or ideally remove section 37.

Otherwise, many, if not most, schemes will find that there is a need to review and revise benefits, with years of arrears to sort out or, in some cases, years of overpayments to reclaim.  For those familiar with GMP equalisation, the hassle and expense of such an exercise is already all too familiar; no-one wants to go through this again.   The impact on the businesses of scheme sponsors will be significant and, in some cases, catastrophic particularly in the case of smaller schemes.

Resources should be being allocated to improving benefits for the current generation of employees (for whom pension provision is generally much lower than for the perhaps privileged ‘defined benefit’ generation) rather than allocating further funds to arbitrarily increasing benefits that all parties have agreed on.  There is a need to concentrate our resources on improving outcomes for pension savers, ensuring better awareness of pension provision and looking at ways of utilising pension saving to benefit the nation’s economic growth rather than spending millions, hundreds of millions or even billions on dealing with a minor technicality in legislation.

The implications of the section 37 issue are wide-reaching.  What will happen in respect of wound-up schemes?  Should these be re-opened and, if so, who will meet the costs?  Are former trustees liable?  Do schemes in the PPF need to be reviewed?  The tentacles of section 37 are likely to get everywhere.

The bedlam needs to be avoided and we would call upon the government and DWP to take the practical and pragmatic view and remove section 37 retrospectively (along with a rule override where schemes have hard-coded the provisions into their rules).  Action is needed now in order to give clarity before schemes are forced into expensive review work and companies are forced to spend resources on assessing and recognising potential extra liabilities in their accounts.        

What is Section 37?

Under section 37 of the Pension Schemes Act 1993 and its regulations, any changes to the rules of a salary-related contracted-out scheme concerning ‘section 9(2B) rights’ (excluding member voluntary contributions) required written confirmation from an actuary to the trustees. The actuary had to ensure that the scheme would still meet the contracting-out ‘reference scheme test’ in place at that time. This requirement was in effect from April 6, 1997, when the reference scheme test was introduced, until April 5, 2016, when contracting-out ended. However, from April 6, 2013, the legislation specified that this requirement only applied to amendments affecting future service benefits, with separate protections established for changes to accrued benefits.

As things currently stand, in the absence of such confirmation, the changes made to the benefits would be void.