Pension challenges impacting professional indemnity insurers: Predicted increase in claims

Released On 16th Sep 2024

The recent Virgin Media case and ongoing action in relation to the Boots Pension Scheme may lead to an increase in claims against pension professionals, including actuaries, solicitors, benefit consultants and trustees. 

They may also herald an increase in claims against pension professionals, with the potential for extensive litigation as pension scheme trustees and sponsoring employers seek to cover losses and additional liabilities. 

These cases emphasise the need for insurers in the professional indemnity market to be vigilant and proactive in their approach to risk management. The debate over accountability has and will become an increasingly contentious issue, with advisers to scheme trustees and sponsoring employers under scrutiny.  

Virgin Media Case: Lack of actuarial confirmation renders amendments ineffective

This case highlighted a significant issue concerning the impact of a lack of actuarial confirmation for formerly contracted-out defined benefit pension schemes. 

Actuarial confirmation was required in respect of certain changes made between 6 April 1997 and 5 April 2016 to defined benefit pension scheme rules where the scheme was "contracted-out" of the state pension (broadly to confirm that the scheme would still comply with statutory contracting-out requirements). These confirmations were generally known as "section 37 certificates".  The vast majority of defined benefit schemes were "contracted-out" and so this case has potentially far reaching consequences. 

The Court of Appeal recently confirmed the High Court judgment on the circumstances in which an actuarial confirmation was needed. 

In the worst case scenario, amendments which reduced benefits could be void, resulting in significant increases in scheme liabilities, in some cases running into millions of pounds.

In practice, many pension scheme trustees are now unclear as to how their governing documents should be interpreted and will, if certain amendments are found to be ineffective, have potentially been administering their schemes incorrectly for over 25 years. This uncertainty will be problematic for trustees looking to secure benefits with insurers. This is a particular issue where trustees have entered into a bulk purchase annuity, a so called "buy-in", with a commitment to converting it into individual policies based on pre-agreed pricing within a specific time period (often 2 years), a so called "buy-out". In those circumstances, where a trustee cannot enter the buy-out within the agreed term, they are likely to lose the agreed pricing and may find themselves negotiating new pricing with little to no leverage. 

This judgment has been met with significant backlash from the pension community.  The pensions industry, including the Association of Consulting Actuaries, Association of Pension Lawyers and the Society of Pension Professionals have issued a joint statement calling for statutory intervention in the form of regulations to retrospectively validate amendments that would otherwise be void due to a lack of actuarial confirmation. However, it is not clear if or when this will happen. It is also unlikely that such intervention will solve all of the issues that are likely to arise as a result of this case. 

Absent regulatory intervention, it is likely that there will be a significant number of further cases seeking clarification over practical issues arising as a consequence of the Virgin Media judgment. It is also probable that trustees and their sponsoring employers will be looking to establish whether their lawyers, actuaries and professional independent trustees have acted negligently. 

Boots Pension Scheme: Insurance of scheme benefits excluding discretionary benefits

The Trustees of the Boots Pension Scheme insured all Scheme liabilities via a £4.8 billion buy-in policy with Legal & General.  That buy-in policy secured benefits for all pensioner and deferred members but removed the option to access unreduced pension from age 60. 

A group of members has challenged the decision of the trustees to remove this discretionary benefit on buy-in and has brought a complaint to the Pensions Ombudsman. It is likely that the Pensions Ombudsman will consider the governance around the trustee's decision making and whether they took appropriate advice in making this decision. 

This case comes against a backdrop of record numbers of buy-in and buy-out transactions. It is likely that the commoditised approach taken on some transactions will give rise to further challenges by members who are not happy about trustees giving up their discretions to provide more generous benefits. 

Whilst it is difficult to overturn a trustee's decision which has been properly made, this case highlights the importance of trustees taking proper advice and demonstrating good governance.  Where a challenge is bought, attention will likely turn to the role of the professional advisers and any professional independent trustee in the decision making process. 

The risk of claims

We are aware that some professionals advising pension schemes and their trustees made precautionary notifications to their professional indemnity insurers in June 2023 following the first instance Virgin Media decision.  Further notifications may now be made. The value of claims may be significant, given the potential liabilities that could fall upon employers.  Professional indemnity insurers will be keeping a watchful eye to see what, if any, litigation ensues following the decision of the Court of Appeal. Claims may arise against many different types of professionals, including actuaries, solicitors, benefit consultants and trustees.  

How can we help

In light of the recent and likely ongoing developments, we are strategically positioned to offer expert guidance and support through potential claims and necessary market adaptions. Our understanding of the pensions industry, combined with our extensive litigation and claims experience, places us in a prime position to assist insurers.  We can also advise on the validity of notifications and the potential exposure to future claims.

We are ready to navigate these changes and offer our expertise to ensure our clients are well-prepared to face the upcoming challenges.