By Kris Weber, Legal Director at Arc Pensions Law
The case concerned the BBC’s desire to reduce the level of future service benefits earned by members of its (apparently cripplingly expensive) defined benefit scheme. New members had been prevented from joining for some time – but the level of benefits still being earned by remaining actives was felt to be both expensive, and out-of-kilter with the BBC’s workforce-wide remuneration policies.
The BBC scheme’s amendment power contained a prohibition on alterations that substantially prejudiced the “interests” of members affected by any change. The restriction (or fetter) said that alterations couldn’t be made unless it was certified, by the scheme actuary, “that the alteration does not substantially prejudice the interests of [affected] members”.
The meaning of “interests” wasn’t clear – and in particular whether it was limited to past service rights, or included those yet to be earned by active members – and so the BBC asked the court. And it said that the meaning of “interests” was as wide as it could possibly be, including in particular unearned future service benefits assuming the active member remained employed by the BBC.
The actuary’s role in the process of altering scheme benefits is something which appears worthy of further exploration, given how any alteration requires actuarial certification that it does not substantially prejudice the interests of members. That seems to put the onus on the trustees, whenever any alteration is proposed by the sponsor, to seek the actuary’s input. And that in turn puts the impetus on him or her to form a view, about whether “substantial prejudice” would be caused to members caught by the amendment. Which is a pretty big ask – albeit not that uncommon in pension scheme rules.
There exists a long line of caselaw going right back to the late 1960s to the effect that, absent fraud or manifest error, the certificate of any expert (such as an actuary) cannot be investigated or overturned. Perhaps the most well-known from a pensions perspective is Cornwell v Newhaven in which, back in 2005, the High Court held that the section 75 certificate given by the scheme actuary on an employer’s withdrawal from a multi-employer scheme couldn’t properly be challenged by the outgoing employer.
So, what does this all mean for the actuarial profession? After all, irrespective of the likelihood of any certificate (about the size of a section 75 debt, the impact on members’ interests, or anything else for that matter) being overturned or even challenged, it is a given that any actuary will want to ensure that any certificate they give is right.
But just how does that actuary assess whether there would, in fact, be “substantial prejudice” to members’ interests by virtue of a certain rule change. Or perhaps, more to the point, how do you assess whether it’s “substantial”. I would suggest that “prejudice” is the easy bit – it’s objective, and binary, and if there’s prejudice (however small it might be) then there’s prejudice. “Substantial”, by contrast, is much more of a subjective concept but does suggest that it has to be of some significance in terms of value.
So, where should the line in the sand be drawn – at what point does prejudice become substantial? It feels like it’s pointing towards something of considerable worth to the “member” (as if they are some sort of homogenous being)? Again, what does that mean in reality, and where does the cut-off lie? Perhaps it’s actually the actuary’s job to just put a finger in the air, assess whether something’s substantial (whatever they consider that means), give any necessary certificate and rely on the fact it’s unlikely ever to be challenged? That hardly seems fair or appropriate (let alone workable), but it’s certainly one potential outcome.
What does seem to be the case, however, is that this decision – and certain other recent rulings of the Court of Appeal – are likely to put more of a spotlight on the actuarial profession, when an actuary’s input is required in relation to proposed rule changes.
As to which, take the other recent bombshell – Virgin Media and the section 37 conundrum. This focuses on another requirement, albeit in a different context, that written confirmation is obtained from the scheme actuary in advance of certain proposed rule changes. The legislation laid down a pure process, nothing more – so what did that written confirmation need to look like? What can be said with some certainty is that a formal certificate isn’t needed, although that was often the form of such written confirmation.
Nothing says it needs to be attached to the deed either. Arguably it doesn’t even need to be referred to in it. What if you know a confirmation was given, but can’t find it? Can you presume one was given, unless there’s categorical evidence that one wasn’t? But all of this, I’m afraid, is a different question entirely…
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