UK FRC issues helpful guidance for actuaries on the Virgin Media legal solution

What is the background to this?

The Virgin Media case held that certain amendments made to the rules of contracted-out salary related schemes between 1997 and 2016 were invalid if the necessary actuarial confirmation had not been obtained when the amendments were made. This has created significant uncertainty about the validity of many historical amendments.

The government plans to address this through the Pension Schemes Bill – which should help schemes to validate most historical amendments where the necessary actuarial confirmation was not obtained or cannot be found.

Trustees will be able to do this by asking their scheme actuary to confirm that in “the actuary’s opinion, it is reasonable to conclude that, on the assumption that it was validly made, the alteration would not have prevented the scheme from continuing to satisfy the [reference scheme test]”.

This legal solution offers schemes the chance to remove the uncertainty that has arisen following the Virgin Media judgments in most cases. However, this depends on scheme actuaries being able to provide the confirmation needed to validate relevant amendments.

We now have the (eagerly awaited) actuarial guidance from the FRC for actuaries to refer to if asked to provide this retrospective actuarial confirmation.

What does the guidance say?

The guidance makes clear that the test under the legal solution – 

“… does not require the scheme actuary to have certainty about whether the rule alteration would not have prevented the pension scheme from continuing to meet the reference scheme test. Instead, the test requires the scheme actuary to reach a reasoned and justifiable conclusion taking into account all the relevant facts and circumstances identified after taking a proportionate approach to the gathering of data”.

This is helpful and should mean that actuaries are able to provide the necessary confirmation in most cases, even where the data and other information available to them now is limited.

The guidance encourages actuaries to use information which is readily available, that is “information which can be obtained without incurring a disproportionate amount of time and effort”. It also makes clear that “[in] the majority of cases, the scheme actuary will not need full individual membership data to be able to form an opinion on whether it is reasonable to conclude that the rule alteration would not have prevented the pension scheme from continuing to meet the reference scheme test”.

The FRC has included a number of examples to illustrate the approach actuaries could take and how much information they may need to provide the necessary confirmation in different scenarios. These show that:

• in some cases, the actuary may be able to provide the required confirmation without needing any information beyond having details of the rule amendment itself (for example, where it is clear on the face of the alteration that it would not have caused the scheme to no longer meet the reference scheme test)
• in other cases, the actuary may be able to reach the necessary conclusion based on indirect evidence, such as subsequent actuarial confirmations or certificates which confirmed that the scheme continued to meet the reference scheme test after the alteration was made, and
• in a minority of cases, more detailed member data (such as evidence of earnings) may be needed

The guidance also includes a section written by the Institute and Faculty of Actuaries (IFoA) to help actuaries meet their professional and ethical obligations in this context.

This reminds actuaries of the need for trustees to seek legal advice in relation to this matter. It also highlights the need to consider and manage any conflicts of interest that may arise and covers scenarios in which an actuary or firm may be asked to provide information or recollections about historical alterations made to a scheme they no longer advise.

What should schemes do now?

The Pension Schemes Bill is still going through Parliament and has not yet received Royal Assent. Therefore, it is not yet possible for a scheme to make use of the legal solution. It is also possible the legislation may be amended further. In which case the guidance may need to be updated. However, major changes are not expected at this stage.

It is anticipated that the legal solution will be in force within the next few months. The fact we now have this actuarial guidance makes it easier for trustees and their advisers to prepare.

Where trustees have already identified historical alterations that may be invalid as a result of a failure to obtain an actuarial confirmation when the alteration was made, they should consider with their legal and actuarial advisers what steps they will need to take to enable the actuary to provide the necessary confirmation once the legal solution is in force.

Where trustees have adopted a “wait and see” approach they should consider with their advisers whether now is the right time to review historical alterations to see if any might need to be validated using the legal solution.

Comment

The guidance issued by the FRC and IFoA is helpful and pragmatic and supports our view that most historical alterations that have been called into question by Virgin Media should be capable of being validated using the legal solution once it is in force. The guidance also supports actuaries and trustees adopting a proportionate approach, particularly when it comes to reviewing and gathering historical data and other supporting evidence.

The guidance does have limitations – for example, it doesn’t address some of the tricky issues in this area, such as how to deal with closure deeds and merger deeds.  However, this is unsurprising given that the legal solution does not directly address these. We hope that the judgment in the Verity Trustees case will help to clarify some of these issues – in particular, whether actuarial confirmation was needed in relation to a closure deed - with that judgment expected in the coming months.

Although the Bill is not yet in force, we are not expecting any major changes to be made to the legal solution. Therefore, in most cases, it would make sense for schemes to now consider their next steps in light of this guidance.

To find out more about the legal solution and how it will work, read our previous briefing.