The Institute of Chartered Accountants in England and Wales (ICAEW) has published its thoughts on the implications of Virgin Media Ltd v NTL Pension Trustees II Ltd in which the courts held that a failure by trustees to obtain a "section 37 certificate" when required would render an amendment to a pension scheme ineffective. The judgment has prompted auditors to question sponsoring employers of pension schemes about the potential impact of additional pension liabilities stemming from the court's decision. In this briefing we consider the implications of the ICAEW statement for sponsoring employers of defined benefit pension schemes.
The Institute of Chartered Accountants in England and Wales (ICAEW) has published a statement on the implications of the Virgin Media judgment for pension scheme sponsoring employers and their auditors.
This will be relevant for most companies with defined benefit pension schemes.
Background
Detail about the case can be found here.
The key impact of the case is that historical amendments to pension scheme benefits may be void which would mean that pension scheme liabilities have been understated.
Defined benefit pension schemes that were contracted out of the state second pension from 1997 to 2016 were required to get certification from the scheme actuary that the scheme benefits met the statutory standard. Where the benefits were amended, it was a prerequisite that the scheme actuary confirmed in writing that the amendment would not prevent the scheme from continuing to comply (the actuarial information is often referred to as a "section 37 certificate" although formal certification was not required).
Employers will of course be concerned if the liabilities which they are responsible to fund have been understated. As liabilities are included in employers' accounts, employers and their auditors now need to consider how to reflect any potential additional liability in the accounts.
The judgment did not provide guidance on what trustees and employers should do where it was not clear if the confirmations had been given or not or how proactive they should be in trying to locate confirmations. There are a number of unanswered questions and a possibility of DWP amending legislation to mitigate the impact.
Key takeaways
Legally, it's the trustees who determine what benefits are payable from the scheme. The ICAEW statement recognises this. In practice, employers should liaise with their scheme trustees and seek to reach agreement on the level of analysis that the trustees will carry out at this stage.
For most schemes, it is likely that trustees will need to give some consideration to the impact of Virgin Media in order for the employer to respond to auditors' questions. However, the ICAEW recognises that the issues are not straightforward, and there may be good reasons not to carry out a full investigation yet. (There is another ongoing court case which may resolve some of the current uncertainty).
The ICAEW appears to anticipate that in most cases, until trustees reach a more definitive view on the impact of the Virgin Media judgment, the likely audit outcome will need to be a note to the sponsoring employer's accounts. Qualified auditors' statements should be very much the exception. However, each scheme will need to be considered in light of its specifics and different audit firms may have nuanced differences in their approaches.
What does the ICAEW statement say to employers?
Accounting standards generally require employers to recognise full pension scheme liabilities on their balance sheet. If pension scheme liabilities may have been mis-stated due to defective historical scheme amendments, consideration is needed as to how to account for pension scheme liabilities while there remains uncertainty due to this issue.
The statement sets out three possible approaches to accounting treatment:
- Do not recognise any amounts or make any disclosure
The statement suggests that taking a "no recognition or disclosure" approach is only likely to be appropriate where:
- trustees are confident that the Virgin Media judgment has no relevance (eg because there were no relevant amendments or it is clear that section 37 certificates were always obtained where required); or
- the size of the pension scheme relative to the sponsoring
employer means that any additional pension liabilities are unlikely
to be material to the employer in any event.
- Disclosure in the pension note to the accounts, but do not
recognise any amounts.
The statement implies that this may be the most usual approach as many schemes will not be in the fortunate position to be able to adopt option 1 above and the statement accepts that in many cases option 3 below will be premature.
- Remeasure the liabilities and recognise a change in the
liability.
The statement acknowledges that this will often not be appropriate in view of the wider remaining questions and the possibility of legislative change.
What does the ICAEW statement say to auditors?
Auditors will need to decide on the approach to take depending on the specific circumstances of the scheme.
The statement suggests that auditors should understand what legal advice the trustees and sponsoring employer have received and what actions, if any, trustees intend to take. Auditors may request copies documents to demonstrate compliance or copies of legal advice. Employers should not disclose any advice given to the trustees and shared with them without express permission. The ICAEW recognises that, for legal reasons, trustees may not be willing to share their legal advice, so there may need to be some discussion regarding what information the trustees will provide.
Auditors need to consider whether they feel that they need to issue a qualified opinion or include an "emphasis of matter" paragraph. The statement says that a qualified audit report may not be a proportionate response "unless it seems probable that a scheme will have an additional material liability to pay benefits as a result of [the Virgin Media judgment]". The ICAEW comments that, "Given the current uncertainties, this is a high bar."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
