The Court of Appeal’s ruling in Virgin Media Limited v NTL Pension Trustees was handed down in July
The Institute of Chartered Accountants in England and Wales (ICAEW) has set out guidance for accountants and auditors in the wake of last year’s Virgin Media ruling.
The Court of Appeal's ruling in Virgin Media Limited v NTL Pension Trustees – handed down in July last year – had potentially adverse consequences for defined benefit schemes that were contracted out of the state pension scheme at any time between 1997 and 2016.
According to the ruling, any amendments to scheme benefits made during that period will now be void unless the scheme actuary had confirmed, when the amendment was made, that the pension scheme would continue to satisfy the statutory standard for contracted-out schemes.
Auditing judgements
In its guidance, the ICAEW said that, given the current uncertainties around the case, auditors of scheme and sponsor entity financial statements must consider what impact, if any, the ruling may have on their risk assessment and planned procedures, as well as the auditor's report.
It said early communication with the scheme sponsor will be important to determine what approach to take. The scheme sponsor, in turn, will wish to be in close contact with trustees to obtain information about the case that might be needed for the audit. Auditors will likely want to know what legal advice, if any, the scheme trustees and/or sponsor have received, and what actions, if any, trustees intend to take as part of the risk assessment for the audit.
The ICAEW noted, however, sponsor entities and their auditors should be aware that legal advice obtained by trustees may not always be shared with the sponsor or their auditor – adding that sponsors may wish to consider obtaining their own legal advice, which can be shared, or discussing with the trustees what can be provided, such as extracts of trustee meeting minutes where legal advice is discussed.
It said auditors of sponsor financial statements will make judgements about the approach that needs to be taken depending on the specific circumstances of the scheme.
Options for auditor's reports include:
- No impact on the auditor's report;
- Including an Emphasis of Matter paragraph to draw attention to the issue; or
- Issuing a qualified opinion arising from a limitation of scope due to a lack of available information.
The accounting perspective
From an accounting perspective, the ICAEW said there were three potential accounting treatments under international financial reporting standards or FRS 102:
- Not recognising any amounts or make any disclosure;
- Disclosing the potential implications of the ruling in the pension note not recognising any specific amounts; or
- Remeasuring the defined benefit obligation and recognising a change to the liability.
It said the most appropriate approach would depend on the specific circumstances of the scheme and on the course of action taken by trustees.
The ICAEW said there were broadly three options that most trustees are considering with regards to the ruling - a wait-and-see approach; an information-gathering approach; or performing a detailed analysis.
