Introduction

Much has been written since the Virgin Media Court of Appeal judgment at the end of July about its impact on private sector salary related contracted-out schemes (see our own briefing on it here).

But what of contracted-out public service pension schemes? Does Section 37 apply to them? Whilst it is not entirely clear at present and no guidance has been offered by the Government, the Government Actuary’s Department (GAD) or the public service pensions industry more generally, there is good reason to think that it does. We are aware that some public sector pensions consultancies also appear to share that view. If Section 37 does apply to these schemes, then the potential implications are even more significant given the size of the main public service pension schemes, in particular the Local Government Pension Scheme (“LGPS”).

We examine the issue of the application of Section 37 to public service pension schemes in more detail below. 

Does Section 37 apply to public service pension schemes?

A close analysis of Section 37 of the Pension Schemes Act 1993 (“S37”) and the now revoked related secondary legislation (in particular, the Contracting-out Regulations 1996 which are the only Regulations enacted under S37 that applied whilst contracting-out was ongoing), reveals no obvious reason why the provisions would not also apply to public service pension schemes.

• Firstly, there is no specific exemption for public service schemes from S37 or Regulation 42 of the 1996 Regulations. Contrast this to the fact that there are statutory exemptions for public service pension schemes from a number of other pension legislative provisions, including the statutory scheme funding regime set out under the Pensions Act 2004 and the MNT/MND provisions set out under that Act. 
   
• In terms of the definition of “salary related contracted-out scheme” used in S37, there is no carve-out for public service pension schemes. Furthermore, the 1996 Regulations specified those schemes which were not “salary related contracted out schemes” and it did not include public service pension schemes.
   
• The 1996 Regulations do not include any general exemption for public service pension schemes. To the contrary, they contained special provisions distinguishing how certain of its provisions applied differently to public service pension schemes (for example, one of those special provisions confirmed that the employer-related investment restrictions would not apply to public service pension schemes in the way that they did to private sector salary related contracted-out schemes).  
   
• As also mentioned, there is no specific carve-out from Regulation 42 for public service pension schemes. But again in contrast they did address the differing treatment that would apply to money purchase contracted-out rights. This would appear to have been the logical place to set out any exemption for public service pension schemes.
   
• Finally, whilst Regulation 42 of the 1996 Regulations refers to “trustees”, the definition provides “in relation to a scheme which is not set up or established under a trust, means the managers or administrators of the scheme”.

All of this taken together seems to suggest that the certification requirements under S37 and Regulation 42 would apply to public service pension schemes in the same way as they would to a private sector pension scheme where it was amending Section 9(2B) rights. 

What is the industry saying about LGPS specific consequences?

Perhaps surprisingly given their scale, very little has been said to date about whether the Virgin Media judgments affect public service pension schemes. As mentioned, we are aware that some LGPS consultancy firms appear to think that it is an issue for these schemes, but there is no official confirmation or indication from Government or GAD regarding whether this is being considered in relation to the public service pension schemes. We have heard though through the pensions grapevine that investigations have been undertaken to locate historic S37 certificates for some of the public service pension schemes. 

As far as we are aware, none of the public service pension schemes are making any allowance for additional S37-related liabilities within their funding and accounting valuations, albeit this is perhaps not surprising and reflects the position being taken by many trustees of private sector defined benefit schemes whilst the overall position remains so unclear (again our earlier briefing covers this). 

What is the likely financial cost should S37 be held to apply to public service pension schemes? 

As mentioned at the outset, the potential liabilities if this issue applies to public service pension schemes could be very significant. To draw a parallel (whilst not the same in all aspects it is nevertheless a comparable set of circumstances), if a potentially void historic benefit change was of the scale of the McCloud issue then that could be in the order of around £15billion of additional liabilities across all of the arrangements. Even if that is an extreme example, it is clear that even one S37 non-compliant historic benefit change could be extremely costly. 

If S37 does apply to these schemes, is it more likely that the Government will be inclined to take action to rectify?

As we mentioned in our Virgin Media client briefing, since the original High Court judgment, three industry bodies have been engaging with the DWP in relation to this issue. This has ramped up since the Court of Appeal judgment was handed down and we understand that the bodies met the DWP earlier this month to request that the Government use its existing legislative powers to rectify the issue.

Whilst the likelihood of the Government being prepared to “fix” the issue is unknown, it may be more minded to do so if it also affects public services pension schemes. 

With the headache of the McCloud remedy still rumbling on, the risk of S37 having an impact for a public service pension scheme may encourage Government action to avoid yet another hugely complex and costly pensions benefits issue. 

Conclusion

It is clearly an interesting point with potentially huge financial implications for public service pension schemes. We expect that it will need to be addressed properly in the coming weeks and months. In the meantime, we will of course keep you updated on any further developments regarding S37 and public service pension schemes. 

If you would like to discuss this issue or any aspect of the Virgin Media judgments, please do not hesitate to contact your usual Burges Salmon pensions contact or Public Sector Pensions Partner, Michael Hayles.