HUNDREDS of thousands of savers could be owed cash in the aftermath of a huge pension mix-up, The Sun can reveal.
A landmark court judgment over the summer found employees of a major company may be owed pension cash – and now experts are concerned that workers at several other firms could be affected.
In July 2024, the Court of Appeal upheld that telecom giant Virgin Media had not obtained the legally required sign-off on changes to its company pension scheme several years ago.
As a result, these changes were deemed invalid, and the court said they should be reversed. If any savers had reduced pension benefits due to the changes, they would therefore be owed money.
We have now learned that Virgin Media is not the only company that did this.
Between 1997 and 2016, many companies made changes to their pension schemes to save money on National Insurance contributions.
Insiders have told The Sun that some of those firms may not have got the required sign-off similar to Virgin Media.
They say that as a result, hundreds of thousands of workers’ final salary pension benefits could be worth more than they expected.
However, sources with knowledge of the situation said pension firms are now pushing back to avoid having to reverse the changes and boost savers’ pensions.
The Department for Work and Pensions (DWP) said it is monitoring the fallout of the Virgin Media case to assess what it means for other pension schemes and their members.
The Virgin Media case and judgment
Back in July, the Court of Appeal made a significant judgment in the case between Virgin Media Ltd and NTL Pension Trustees II.
Legal firms believe this decision could hugely impact UK employers who have Defined Benefit (DB) pension schemes.
DB schemes, also known as “final salary” schemes, are where savers receive a guaranteed income for life in retirement.
The Virgin Media case focused on the rules around changing pension benefits in DB schemes which had opted out of the State Second Pension between 1997 and 2016.
During this time, companies were looking to make changes to these schemes to make them more sustainable to run long-term.
So, schemes instead began to offer benefits that were at least as good as the “additional” State Pension, which meant both members and employers could pay lower National Insurance Contributions (NICs).
But, there was a catch to making these changes.
Under to the Pension Schemes Act 1993, specifically rules under “Section 37”, these firms needed a certificate from an actuary – a type of financial expert – to confirm the changes met the required standards.
In the Virgin Media case, the Court of Appeal said the company had not got the changes to its scheme signed off correctly, making them invalid.
In some cases, the changes that were made may have reduced the amount of money savers in the scheme were paid.
If those changes were invalid, it meant that those employees’ final salary pension benefits may be worth more than currently understood.
It was estimated that the additional cost to the scheme if the amendments were voided, would be £10million.
However, the court also ruled that any amendments to increase the value of members’ benefits were null and void – not just those to reduce them.
It’s important to note that the ruling has not so far had a material financial impact on Virgin Media – the above figure is an estimate of how much it could cost.
A Virgin Media spokesperson said: “Following the Court’s decision, we are working with all parties to ensure that the pension scheme is being administered correctly.”
Virgin Media Ltd v NTL Pension Trustees II summary
ON July 25, the Court of Appeal ruled on the Virgin Media Ltd v NTL Pension Trustees II case.
This judgment could significantly impact UK employers who sponsor Defined Benefit (DB) pension schemes.
Legal Context:
The case centred on contracted-out pension benefits and the legal requirements for altering these benefits.
Between 1997 and 2016, DB schemes could opt out of the State Second Pension, requiring them to provide benefits at least as good as the State Pension.
Changes to these benefits needed an expert (or actuary) to sign off to make sure they met statutory standards. This confirmation, known as a “Section 37 Confirmation”, was necessary for any amendments.
Case Facts:
In 1999, the NTL Pension Plan made changes to its trust deed and rules, affecting contracted-out benefits. However, no Section 37 Confirmation was found for these changes.
In 2010, further changes were made based on the 1999 amendments, again requiring Section 37 Confirmation.
The issue was whether the 1999 changes were even valid without this confirmation.
High Court Decision:
Back in 2023, the High Court ruled that the 1999 changes were invalid due to the lack of necessary actuarial confirmation, making any further changes in 2010 also invalid.
The judgment stated that this outcome would cost this scheme around £10million.
Court of Appeal Decision:
Virgin Media appealed in a bid to seek guidance from the court as this was an area with no legal precedent.
It argued that Section 37 did not invalidate changes made in 1999 and only applied to benefits earned before the changes.
The Court of Appeal dismissed the appeal in July, stating that the law clearly required actuarial confirmation for changes to contracted-out benefits, regardless of whether they were past or future benefits or whether the changes were adverse.
What this could mean for thousands of employees
Between 1997 and 2016, many companies made amendments to their final salary pension schemes in a similar way.
It’s thought that most of those amendments ultimately reduced (as opposed to increased) the value of members’ benefits, with the aim being to reduce the costs for companies.
Sources familiar with the matter told The Sun that a significant number of companies which made these changes during this period did so without the required sign-off from an actuary.
There are many reasons for this. It may have just been extra admin that was overlooked, or it may have been that firms didn’t understand the importance of the certificates and potential consequences at the time.
There remains hope of a government solution to avoid confusion for hundreds of thousands of people
David Brooks
But this mistake could land those companies with a hefty bill.
Meanwhile for savers, if they have a final salary pension scheme, their pension could be worth more than they expected.
The Virgin Media case is seen as a landmark one by pension law firms because the decision could have serious implications for other companies which made the same move as Virgin.
While it’s still early days since the court ruling and hard numbers are not yet clear, experts have told The Sun that the potential impact could be significant.
David Brooks, Head of Policy at independent pensions consultancy Broadstone, said: “The pensions industry is currently wrestling with how to deal with the Section 37 ruling given its wide potential impact.
“There remains hope of a government solution to avoid confusion for hundreds of thousands of people, with unexpected questions around their benefits as well as disruption to the strategic management of their scheme.”
He added that many pension schemes will be looking back at decisions made over 20 years ago and deciding if there’s enough evidence of the necessary paperwork to justify any changes it made.
There are approximately 5,000 DB schemes in the UK with a total of around £1.4trillion in assets.
Mr Brooks added: “It is very hard to predict the full impact as it will be a lottery where the relevant paperwork can or cannot be found.
“This could also affect benefits paid from the Government’s lifeboat fund, the Pension Protection Fund, which may encourage the DWP to provide a pragmatic retrospective solution.”
How will I know if I’m affected?
Sources with inside knowledge of the situation told The Sun that if you are part of a single large scheme with a few thousand members, you may be more likely to be affected.
It’s tricky to estimate how many people are affected and exactly how much pension pots could increase at this stage, but sources say that the changes companies made to reduce costs were, in some cases, sizeable.
This means the potential increase in value could also be substantial.
Ultimately, until each scheme responds to the court decision by reviewing its own paperwork, no one will know for sure how big it could be.
In order for employees to see any kind of boost to their pension, their scheme would need to be found to not have the actuary sign-off required to reduce members’ benefits.
The DWP would then have to enforce any changes for employees to receive a boost.
Think you might have been affected by this issue? Get in touch at money-sm@news.co.uk
What are pension firms doing about it?
While the recent judgment could turn into good news for savers, it has spelt bad news for the companies which will have to bear the brunt of any costs.
Mr Brooks explained: “Many employers running contracted-out DB schemes will feel aggrieved, particularly if everyone believes that an appropriate process was followed at the time and the scheme has been managed on this basis for decades.
“Unexpected costs for the company could be significant.”
Because of this, The Sun understands pensions lawyers and actuaries are lobbying the Government to persuade it to retrospectively remove its requirement for schemes to have got a Section 37 certificate at the time they changed their scheme benefits.
The Association of Consulting Actuaries, the Association of Pension Lawyers and the Society of Pension Professionals have all asked the DWP to consider reversing the outcome of the case.
If successful, the DWP would change its legislation to allow schemes to retroactively validate the changes made in the past without any consequences.
Those familiar with the situation told The Sun this is a “self-serving move” in order for firms to avoid professional negligence claims, at the cost to everyday scheme members who would receive lower benefits as a result.
Responding to this article, a DWP spokesperson told The Sun: “We have been closely following this case.
“It is important that schemes, their members, and sponsors all continue to have complete confidence that the pension system operates effectively.
“We will carefully consider the wider implications for both schemes and scheme members as we explore the implications of the judgment.”
What’s next?
Experts say most DB schemes have likely not yet assessed what the outcome could mean for them.
However, now that summer is over, it’s understood that schemes will now be looking at every change it brought in over the last two decades.
Steve Webb, former pensions minister and current partner at pension consultants LCP said: “This court ruling creates a lot of uncertainty for traditional DB pension schemes.
“Each scheme is likely to have to review all the rule changes it has made over the years and see if these were signed off correctly.
“If not, and if DWP does not take any action to help schemes, there could be very considerable time and cost involved in tracking down documentation going back for decades and potentially recalculating member benefits as if the rule change had not occurred.”
Mr Webb also pointed out that where changes are being reviewed, it might affect people negatively – not just positively.
The outcome could affect “beneficial” changes (such as those who saw their pensions boost) too.
So if a particular scheme’s rule changes actually improved things for some members, but they didn’t get an actuary to sign off, then those changes could also be struck out.
This could mean people end up with less in their retirement pots.
Mr Brooks also said the potential impact of the Virgin Media case could leave people worse off and their retirement plans delayed.
He said: “Whilst at first glance the chance of additional benefits for members might sound appealing, some benefit improvements may be invalidated so some people could be worse off.
“Members could also face delays or disruption to their retirement and tax planning as a detailed review and recalculation of historic benefits across large numbers of schemes can take years to resolve.”
What should you do if you think you’re affected?
If you think you could be affected by this, now is the time to be proactive.
Start by writing to your pension scheme’s trustees and asking whether the judgment affects your benefits.
While they may not be able to give a definitive answer right away, it’s a reasonable request to make.
Trustees are legally obliged to understand the benefits they provide members.
Some pension lawyers are said to be telling trustees that they need to look at the issue now, to know if the judgment affects their scheme.
But others are saying they should wait and see if the DWP bring in the law change first.
The fact remains – the Virgin Media case has opened up a potential Pandora’s box of pension pot increases.
While it’s still too early to tell exactly how far-reaching the effects might be, it’s clear that this could be a game-changer for thousands of workers in England and Wales.
The Sun's view
By Laura Purkess, Consumer Features Editor & Consumer Champion
The rules around pensions are riddled with complexities. Some pensions experts still have trouble untangling all the various wording and requirements.
So, it’s no wonder some firms may have made errors when making very technical changes to their pension schemes.
But, once again, it is savers who will bear the brunt of these complexities.
Many savers blindly assume that everyone involved is doing the right thing for them and their retirement.
But errors are often made as a result of conflicting, complicated rules, which means this isn’t always the case.
We recently revealed that thousands of savers may have lost a legally protected pension age due to conflicting HMRC rules and a mix-up in the pensions industry.
And the DWP is currently grappling with several underpayment issues relating to the state pension.
Experts have told us there could be widespread implications following the recent Court of Appeal judgment, but what that looks like in practice isn’t yet known.
If it’s decided that every firm should be digging out this sign-off from decades ago, that would be a huge administrative burden for firms.
But, it should also ensure savers aren’t left out of pocket if the changes wouldn’t have been signed off at the time they were made.
Hopefully, the Government will step in with a solution to ensure this is resolved as smoothly as possible and that these kinds of mistakes don’t happen again.
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