What happens when the pensions industry gets drawn into bigger world events?

Want to hear more on the LDI crisis and the Virgin Media case? Click here to listen to James and Pete’s recent podcast where they dive deeper into the subject.

So much of what we do is complex and technical.  To the outside observer, the jargon we use must seem impenetrable: s75 debts, moral hazard powers, rectification, risk transfer…the list goes on.

But our world is inextricably linked with, and impacted by, the real world. Take last autumn, when the LDI crisis saw pensions hitting the front page.

The LDI crisis

As litigators, we have seen significant interest arising out of the LDI issues.  Barely a week goes by without somebody raising a question about the impact of the crisis on their scheme’s financial position.  And, it is a matter of good governance for trustees to investigate potential claims, ask who is responsible for any losses suffered and whether compensation can be claimed.

Simple questions one might think.  But these are complex claims raising difficult issues and the numbers at stake mean they are likely to be keenly contested by any potential defendant, whether an LDI manager or an investment consultant.

Clients say ‘Surely all schemes are in the same boat?  Can we not just club together?’.  We haven’t yet seen a class action pop up, but time will tell.

Class actions rely on a litigation funder.  These are commercial operations who bear all the risk for a cut of the reward.  They like simplicity and claims that will deliver return.  They have to build a book of business to deliver this return and look for identikit claimants. While it is perfectly possible that one or more class actions may spring up, this is likely to take time and is not certain – so trustees and employers need to think carefully about whether to wait and hope, or take action themselves.

For those considering taking their own action, it is worth remembering that a litigation process is exactly that – a process.  You take it a step at a time and then assess whether to take the next step.  And this is what many trustees will do: investigate and consider whether to proceed and, if they proceed, keep that decision under constant review.

‘So pensions is not niche, is that what you’re telling me?’

Well yes and no – a typical lawyer’s answer!

At times it is, impacted directly by the biggest events around us.  But at other times it is incredibly niche.  And another event in recent times demonstrates this very well.

The Virgin Media case

There has been much discussion following the recent judgment in the Virgin Media case about the requirements of ‘Section 37’.

Many clients find the rules around scheme amendments an oddity, with legislation prescribing hoops that have to be jumped through for a deed to be valid and different hoops applying to different circumstances.  In broad terms, Section 37 itself requires (a) the trustees when executing deeds affecting relevant members’ rights for contracted-out DB schemes executed between 1997 and 2016 to have “informed the actuary in writing of the proposed alteration” and  (b) the actuary to have “considered the proposed alteration” and  to have “confirmed to the trustees in writing” that they are satisfied that the scheme would continue to satisfy the relevant statutory standard if the alteration were made.

The Court ruled that any historical amendments made by deeds that did not comply with these requirements  are void.

So, what does that mean in practice?

It’s important to bear in mind that the case is being appealed, so the law as it stands is not yet settled.  There are also determined efforts being made to lobby the DWP to amend the legislation itself to overcome the implications of the Court’s decision.

What should trustees and employers do in the light of the case?  It is obviously important to be aware of the potential implications, but we don’t think there is or should be a ‘one size, fits all’ response here.

Some might decide to carry out a comprehensive review of all relevant amending deeds. But even this might not be conclusive – just because a written confirmation doesn’t exist or can’t be found does not necessarily mean that the requirements of Section 37 were not met. It may come down to a question of evidence – and the judge in the case was expressly asked not to consider the evidence there.  Instead, she was asked to simply assume that there had been non-compliance.

In the same way as they consider other risks regarding the legal formalities of deeds (such as valid execution), trustees are entitled to weigh up the costs and benefits of such an exercise in their particular circumstances and, in the exercise of their discretion, decide how to proceed – both with any review and, if one is carried out, with any subsequent steps.

It should also be borne in mind that, if there has been a failure to comply with Section 37, it is possible that someone may have been at fault and that it might be possible to bring a negligence claim to seek to recover the value of any unintended additional liabilities arising from an invalid amendment.  But it will depend on the particular circumstances, including whether any such a claim might already be time-barred.

So, two subjects that are on the minds of those involved with pensions, trustees and employers alike, one very niche, the other arising directly from a major event.  This is the pensions world – micro and macro, techy and accessible.  And that’s the way we like it!

< Back to blog