Appeal dismissed - another fine mess: scheme amendments and section 37 certificates
“I think Bacon J came to the right conclusion in her impressive judgment and would dismiss the appeal.”
Today, in one sentence, Nugee LJ and his colleagues in the Court of Appeal, Asplin LJ and Jackson LJ have given pension lawyers a very big headache. This is one which has been brewing for a while but that the pensions industry had been hoping to avoid.
Confirmation from the Court of Appeal that Section 9(2B rights) comprise both past service benefits and future service benefits means a Section 37 certificate is needed where changes have been made to future service benefits in a scheme that was contracted-out on the reference test basis.
We also know, from the High Court decision last year, that where a Section 37 Certificate hasn’t been provided, those amendments are void. Pension Scheme amendments – a new headache for Trustees? (irwinmitchell.com)
These seemingly simple statements bring a whole world of uncertainty if not absolute chaos to a large number of defined benefit schemes. However, many schemes, and their advisers, will be grasping at the one element of hope in the judgment, if they are in the position described by Nugee LJ at paragraph 23 “If s. 37 did apply, it was not necessary for there to be a formal certificate appended to the Deed – all that was required was written confirmation – but to date no such written confirmation has been found.” (our emphasis added)
Our view:
The Court of Appeal’s decision leaves pension schemes in a very unsatisfactory position and it does nothing to promote the general public’s trust and confidence in the UK defined benefit pension system.
It also creates something of a lottery. Trustees of contracted-out final salary pension schemes are now going to have delve further into their ancillary paperwork to see if they can find any written confirmation from the scheme actuary that would be sufficient to satisfy the Section 37 requirements - some will have the complete collection, and some won’t have any. Most likely a scheme will be missing some paperwork on at least one amending deed. Their ability to find sufficient documentary evidence will depend on their historical record-keeping process as well as the dates of any purported amending deeds. Concerns about GDPR compliance may well somewhat ironically have increased the risk of schemes no longer having their Section 37 paperwork available.
We know that more recently actuaries preferred to provide email confirmation rather than providing a formal Section 37 certificate that was appended to an amending deed. Time to find those emails!
However, would the signed pension trustee minutes (approved by all present) of a trustees’ meeting where the scheme actuary confirmed the amending deed satisfied Section 37 be sufficient?
What about reference in the recitals to the amending deed to the Section 37 certificate or what about a draft Section 37 certificate that was not signed?
Logically one would expect the ancillary deeds, emails, letters to be sufficient but this is not necessarily clear cut. What about schemes that have bought out their benefits and been wound up- should trustees proactively re-open matters?
This potentially enormous problem of invalidity that now surrounds historic changes to final salary contracted pension schemes from April 1997 onwards runs directly counter to the Government’s direction of travel for pensions more generally. It wishes to promote certainty, security of pension savings and unlock funds for productive investment. Invalid Section 37 changes mean higher liabilities for schemes, therefore less cash available for investment. Time for the Government to step in. There is already a precedent in place for the Government to follow to issue retrospective regulations on this particular section of law. Surely now is the time for the Government to do so and for the Government to ensure that the amending regulations are widely drafted so they resolve the problem for all schemes, including those schemes have since been rescued by the Pension Protection Fund, where the benefit changes have not actually adversely affected Section 9(2B) rights.
