Articles - The Virgin Media fix: a legal and actuarial double act

 

There are two technical legal difficulties:

 

One approach we have taken recently is what I describe as “Lawyers First; Wide Net”.

 

The TAG rightly emphasises that actuaries should not give legal advice. There is a risk in legal input being sought only if the actuary has identified a problem. Trustees or sponsors may see that as a cost-saving measure but it could turn out to be the opposite. The real effect of the amendment may be hidden. While adviser risk could be managed contractually, the purpose of the exercise is to resolve uncertainty, not preserve it. All parties benefit from establishing a firm foundation for the future.

 

The responsibility lies with trustees to specify the rule alterations they are asking the scheme actuary to confirm.  Some amendments are straightforward such as a single change applying only to future accrual. But it is not always safe to rely on the words on the page.

 

Complications commonly arise where an amendment:

 

Confusion is also common where multiple amendments are made together or where the effects of A-Day deeds or merger deeds need to be analysed. The PSB excluding wound-up schemes was helpful, but mirror image bulk transfers do raise issues.

 

Replacing the entire trust deed and rules can be particularly challenging. Even when described as “consolidation” this often involves material wording changes. Identifying what changed can be difficult; even more so if the earlier rules are missing. The provisions being replaced could themselves be invalid. Starting with the legal advice might sound like a fee generation project for lawyers but read on …

 

Rule alterations between 1997 and 2016 took many forms. How they interacted with contracting-out requirements can be complex. Pension lawyers may disagree on the analysis. However, a definitive legal conclusion is only required where it makes a difference.

 

Some clients have found it helpful to cast the legal net widely, erring on the side of inclusion and avoiding in-depth analysis that turns out to be unnecessary, working in partnership with the scheme actuary.

 

What is a PRA? Clause 103(7) of the Bill defines it as an alteration that could not lawfully be made at the time unless regulation 42 was satisfied. Applying that definition raises several questions:

 

The TAG contains useful practical examples, but it is appropriately caveated and not a substitute for legal advice.

Taking a broad view produces a longer list of amendments for the scheme actuary to consider. However, under a “RAG” analysis, changes can be coded green if they appear capable of confirmation. Almost all can be confirmed based on understanding the nature of the change. It is not important to establish whether they are technically PRAs: the confirmation will validate those that are. Amber would mean data investigation is needed, and red would flag a legal concern about confirmation.  The actuary must form an opinion on each alteration, which means each one needs to be identified.

 

Experience to date suggests a long list typically results in only two or three amber items and possibly one red – often closure to future accrual.

 

Amber items requiring data investigation would include:

 

Some amber or red alterations may prompt the need for further legal analysis. It may be possible to conclude that they were not PRAs and take them off the list.

 

Rule amendments closing to future accrual remain puzzling. A scheme with no future accrual could not continue to contract out (although we have seen some with section 37 confirmations - a happy result which seems to work!). But surely contracting out did not entrench a right to future service accrual. Further clarification may emerge, possibly from the Verity ruling.

 

Where closure was achieved through contractual variation or active members opting out, there may be a so-called “housekeeping” rule amendment documenting the true underlying legal position outside the rules. Referring to overriding legislation (e.g. civil partners) is also housekeeping, though sometimes the rule amendment goes further than the minimum.

 

Favourable changes are rarely problematic. In most cases they can be re-made now with retrospective effect and past payments ratified, assuming a continuing amendment power and sponsor support. While invalidity could, in theory, allow sponsors to withdraw accidentally “hard coded” past improvements, we have seen no appetite for that in practice. If a putative PRA cannot be confirmed, it is time to drill down into whether it can be taken off the list. 

 

Stay within the actuarial role. This does not include advising whether a change is a rule alteration, whether it was validly made, or whether it was overridden by law or contract. Keep your PI cover - don’t be an accidental lawyer!

Insist on proper scoping at the outset. Actuarial confirmations should relate only to clearly identified rule alterations provided by the trustees. Actuaries should not be expected to uncover, reconstruct or categorise historic alterations as part of this exercise.

Expect uncertainty at the outset and simplification later. An initially long list of alterations typically narrows quickly once relevance is assessed.

Focus effort where evidence is required. Most alterations can be easily confirmed. A much smaller subset may require data-driven analysis to assess potential impact on the reference scheme test.

Anchor opinions to specific changes. However obvious the outcome may seem, this is how to make the actuarial confirmations effective. 

Use scoping as professional risk management.  It is not fair to ask actuaries to uncover or classify historic amendments. Clear instructions, explicit assumptions and well-defined boundaries protect actuaries and are reasonable to expect.

Work hand in hand with scheme lawyers. Joined up advice is the best way to deliver cost-effective, sound and future-proof outcomes for our mutual clients.