Amendments to contracted-out schemes: actuarial guidance released

The Financial Reporting Council (FRC) has issued technical actuarial guidance on the Pension Schemes Bill clauses providing a legislative ‘fix’ to long-running issues with historic pension scheme amendments. Trustees and employers with schemes that may have been affected by those issues should engage with actuaries in light of this development: particularly in circumstances (e.g. a buy-in) where prompt resolution is required.

A reminder of the backdrop

In 2024 (see our Law-Now here) the Court of Appeal held that where certain DB scheme amendments affecting contracted-out rights were made without a ‘Section 37’ actuarial confirmation, those amendments were void. The decision caused great concern within the pensions industry.

In June last year, the Government announced that, due to the need for schemes and employers to have clarity on liabilities and benefit levels, it would introduce legislation to fix the problem. It delivered on that commitment by tabling new clauses for the Pension Schemes Bill which - in broad terms - state that an amendment can be treated as having always been valid if certain conditions are met.  A key condition is that trustees obtain actuarial confirmation that the amendment would not have prevented the scheme from continuing to satisfy the required statutory benefit standard at the time. See our Law-Now here for more detail.

The new guidance

The FRC has now issued its promised guidance to assist actuaries with their duties under the new Bill provisions. It was previously thought that the guidance might not appear until Royal Assent, but it has been published now “to give actuaries sufficient time to prepare”.

The guidance considers the wording used in the relevant Bill clauses, the approach actuaries can take to data issues, and how to apply proportionality. It lists the types of evidence that actuaries may wish to review and take into account and gives examples of cases where further information either is - or is not - needed to allow confirmation.

In particular, the guidance fleshes out the specific provisions in the Bill which say that the actuary:

• must consider it ‘reasonable to conclude’ the amendment would not have prevented the scheme from continuing to meet the statutory standard (confirming that certainty is not required to meet this standard);
• may act on the basis of the information available to them, as long as they consider it sufficient for the purpose of forming an opinion (encouraging actuaries to take a proportionate approach); and
• may take any professional approach, including as to assumptions, or relying on presumptions, that is open to them in all the circumstances (providing a flowchart and examples for different potential scenarios and noting in some cases it will be possible to provide confirmation based solely on the nature of the amendment itself).

The relevant press release notes that the guidance may be subject to further updating as the Bill progresses through the House of Lords.

Next steps for schemes

The early issue of this guidance is welcome. It contains useful and pragmatic assistance in the context of parties having to consider amendments that will have taken place years or decades ago.

Although the Bill is yet to receive Royal Assent, the shape of the ‘legislative fix’ is unlikely to change significantly. Trustees and employers of affected schemes should engage with scheme actuaries and consider what steps can be taken now, including what if any further information the actuary may require, to progress the relevant retrospective confirmations on a timely basis once Royal Assent is received.

In a related development, the Pensions Regulator is quoted as saying that it will issue its own guidance on the legislative fix, to help trustees navigate the issue. This is expected “this Spring”.

If you have any questions, please speak to your usual contact in the CMS Pensions team.