ICAEW guidance following Virgin Media v NTL Pension Scheme – Accounting for changes in trustee and employer liabilities

The Institute of Chartered Accountants in England and Wales (ICAEW) has published guidance on the accounting and audit considerations in the light of the Court of Appeal’s decision in Virgin Media Ltd v NTL Pension Scheme.  We discussed some thoughts on this case in our previous blog (see here).  The central issue of Virgin Media is that some historic scheme amendments may be void, and as a result liabilities may have been over- or under- stated.  There is, however, still uncertainty as to the full implications of the case and how the government will respond to industry demands to legislate to deal with the problem.

The ICAEW guidance is aimed at the sponsoring employers of formerly contracted out defined benefit (DB) pension schemes, and their auditors, rather than the pension scheme trustees.  However the guidance does also consider the main options open to trustees of DB scheme to understand how the Virgin Media judgment impacts their DB schemes, as the approach taken by the trustees and the extent to which they have identified any issues, will affect what the employers can do.

Employer considerations

The ICAEW guidance specifically focuses on the accounting considerations for sponsoring employers, who under IFRS regulations are required to account for their liabilities for pension schemes on their balance sheets. The ICAEW identifies three possible approaches: 

• No recognition or disclosure of additional liabilities – the ICAEW cautions that this is appropriate only where trustees feel confident that scheme amendments were correctly made or that the implications of the Virgin Media case do not pose material risks to the scheme. Should employers pursue this strategy where the extent of any possible risk is less clear, they should be prepared for potential challenges from auditors. 
• Include a disclosure in the pension note of their accounts– if the trustees of the relevant scheme have decided to wait for additional clarification, or it is unclear whether the sponsoring employer will need to change their estimation of their scheme liabilities, the ICAEW suggests that disclosures outlining ‘additional uncertainty’ around DB obligations be included in accounts. 
• Remeasure the sponsoring employer’s obligation to the scheme – where the trustees have carried out a detailed assessment of scheme amendments and issued an estimate of the subsequent impact on liabilities, the ICAEW guidance suggests that sponsors consider seeking separate actuarial calculations for their financial statements, as well as separate determinations outlining their preferred accounting treatment for any changes to obligations found in these new estimates.

Issues for the auditor

The guidance for auditors of sponsor financial statements makes it clear that they will be expected to make judgments about the approach that needs to be taken depending on the specific circumstances of the scheme. In order to enable them to do this they will need to engage with the sponsoring employer and ascertain what legal advice has been received and what action, if any, the trustees have taken.  

Options for auditor’s reports include: 

• deciding that the judgment has 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 consequences of not being able to secure an unqualified audit opinion can be serious, and could have significant implications for the company's reputation, ability to secure financing, and investor confidence. 

Conclusions and next steps

If the pension scheme is material in the context of the employer’s finances, early engagement with the auditors to ascertain what steps may need to be taken will be key.  Individual audit firms will no doubt take the guidance into account but will adopt their own policies on the issue.

There is still uncertainty about the long-term implications of the Virgin Media decision, and it is not immediately necessary for all schemes and employers to incur expense in identifying all the legal implications and making changes to the scheme or the employer accounts. It may not yet be possible to tell how material the potential impact could be, or whether there will ultimately be any impact at all.

However the ICEAW guidance does note that where trustees have not carried out a detailed investigation, it would nevertheless be reasonable to expect them to have considered the situation to get some idea of whether their scheme is likely to be affected.  This can then help to direct the employer and audit response.

Employers should seek to agree an approach with the trustees, noting that legal advice obtained by the trustees may not automatically be shared with the employer and its auditors. 

If you would like to discuss in further detail any of the points raised in this blog post, please contact Andrew Murphy or your usual Freshfields contact.