The recent NTL Pension Trustees II Ltd vs Virgin Media Ltd ruling has created uncertainty for auditors, trustees of defined benefit schemes and sponsor entities, particularly around benefit payments and financial reporting.

Past scheme amendments could be deemed invalid without proper actuarial certification, potentially impacting pension liabilities as a result of the decision. With key legal questions still unresolved and further court rulings expected, affected parties must carefully assess their position and prepare for possible financial and regulatory implications.

The case, brought by the trustees of the NTL Pension Scheme against Virgin Media Ltd, revolved around the interpretation of section 37 (s37) of the Pension Schemes Act 1993 and the need for an actuary to certify amendments to defined pension schemes.

Under section 9(2B) of the Act, schemes that were contracted out of the additional state pension were required to provide benefits at least equivalent to a minimum level laid out in a hypothetical ‘reference scheme’. This was known as the reference scheme test. When amendments were subsequently made, s37 of the Act required scheme actuaries to certify that the scheme still met this standard.

According to the court’s decision, any amendments to scheme benefits that affect members’ section 9(2B) rights during the relevant period will be void unless confirmation from the scheme actuary was obtained, in writing, when the amendment was made. The ruling, upheld by the Court of Appeal in July 2024, may affect schemes that were contracted out of the additional state pension at any point between April 1997 and April 2016, when contracting out was abolished.

Outstanding questions

The ruling has created uncertainties for trustees of defined benefit schemes about whether the scheme is paying the correct benefits. It also raises concerns for sponsor entities, who are required to recognise the full defined benefit obligation in their financial statements, about the potential need to re-measure pension scheme liabilities and how this should be reflected in financial reporting. Auditors of both scheme and sponsor financial statements will take an interest in these matters as part of their engagements.

Unfortunately, at present, significant questions remain about how the ruling should be applied. For example, it is unclear whether amendments might become valid when the scheme actuary next re-certifies the scheme as part of the triennial valuation process. A further court case is due to be heard in 2025 to clarify this point. It is also uncertain whether whole amendments will be deemed invalid if no actuarial certification can be located, or just the parts of amendments that relate to certain member rights.

Various industry bodies have called for the Department for Work and Pensions to make regulations to validate any amendments that are held to be void solely because a written actuarial confirmation cannot be located.

Potential scenarios

ICAEW staff have discussed the case with a number of stakeholders. The Audit and Assurance Faculty’s overview aims to set out our current understanding of the key judgments and considerations that trustees, sponsor entities and auditors might need to take into account. It outlines some potential scenarios and courses of action that could be taken in response.

It is for general informational purposes only and does not make any recommendations about the most appropriate course of action for any individual scheme.

Trustees must act in the best interests of scheme members and must weigh up their assessment of the risk that the scheme is not paying the correct benefits against the cost of performing a full investigation. Their choices will likely be informed by legal advice that they have obtained.

Following on from this, sponsor entities preparing their financial statements will need to assess how to present the potential impact of the ruling in their financial statements. Preparers must decide whether they should re-measure the defined benefit obligation, and whether to disclose the possible implications of the ruling in the financial statements.

Finally, the sponsor entity auditor must consider whether the ruling has been appropriately reflected in the scheme financial statements. To make this determination, auditors will likely want to know what legal advice, if any, has been obtained, and what actions, if any, trustees intend to take.

Trustees, sponsors and auditors are encouraged to use their own judgement and knowledge of the specific circumstances of each scheme to determine how to approach the ruling, and to seek professional legal advice where appropriate.

Access Virgin Media pension ruling: sponsor entity and auditor considerations here.