Pension tension: counting the cost of the Virgin Media court case

Since 2023, an ongoing legal dispute has been taking place between Virgin Media and the trustees of the NTL pensions scheme, the outcome of which may have far reaching ramifications for pension schemes, sponsoring employers and their advisers. The exact impact remains unclear and is subject to possible future legislation – however, industry professionals should look to familiarise themselves with the facts and prepare for a range of possible outcomes. In this blog, we discuss the background to the case and consider the possible impact from a financial reporting and audit perspective.

What’s the background to the case?

Prior to changes to the State Pension in 2016, sponsor employers of defined benefit schemes could take advantage of the option to ‘contract out’ employees. The idea behind this was that employers and employees who were members of a sponsored occupational defined benefit scheme could save cash by reducing National Insurance Contributions (NICs) intended to support the State Pension, provided the sponsor employer could guarantee that the scheme would ensure that benefits provided would not be any less than if the members had remained ‘contracted in’ to the State Pension, in this way also reducing the burden on the public purse. Under the relevant legislation, when making any amendments to scheme benefits, sponsor employers and scheme administrators were required to obtain written confirmation from the scheme’s actuary that the proposed amendment was in line with this premise.

A challenge was brought in 2023 by the trustees of the NTL scheme that an amendment had been made to the scheme pre-2016 without this actuarial confirmation. A subsequent appeal decision in 2024 determined that this confirmation was required for amendments impacting both past and future service rights.

What are the implications of this and who does it affect?

As a starting point, it is possible that there is no impact at all on some schemes, where the schemes in question have strong governance and are confident that they can locate actuarial approval for any amendments made during the 1997 to 2016 period in question (or have already done so). Equally, whilst schemes may not be able to find this documentation, it may not necessarily indicate a financial impact (beyond the potential cost of actuarial fees required to retroactively review any relevant amendments, additional administrative burden and time spent by auditors reviewing the evidence, which may result in an extra fee). However, there are likely to be some cases where there is no actuarial support and subsequent review determines that amendments were not in line with requirements.

Both pension schemes themselves and sponsoring employers, as well as scheme administrators, auditors and actuaries acting for schemes will potentially be impacted by this. From an accounting and audit perspective, the Pensions Research Accountants Group (PRAG) has recently published a discussion paper on the possible effect on financial reporting.

Pension Schemes

Somewhat counterintuitively, as far as their core financial statements are concerned, pensions schemes themselves are solely concerned with past liabilities. Unlike sponsor (or member, in the case of multi-employer schemes) employers, defined benefit pension schemes do not typically include an actuarial surplus or deficit on the balance sheet. In this instance, the possible outcome here is that a subsequent actuarial review determines that benefits have been underpaid in the past, creating a current liability for benefits payable. Where the scheme has less certainty over the outcome (or is instead opting to hold off on any actions pending the possibility of the issue being resolved by subsequent legislation), trustees and management may need to consider whether inclusion of a provision or contingent liability is appropriate PRAG’s discussion paper has more details

Sponsor or member employers and their auditors

Inevitably, PRAG’s guidance is focused on implications for schemes themselves – however, the situation could have consequences for employers also, who will typically have to include a net liability (or asset) representing the surplus or deficit in the scheme (or their share of it). This is often a material estimate and subject to a high level of estimation uncertainty owing to its sensitivity to changes in subjective underlying assumptions. As such, a change to the level of benefits payable will likely impact this estimate as employers will need to increase contributions to cover future liabilities as well as increase any secondary contribution rate to cover historic increases to the deficit. Aside from the cost of increased contributions, this will also potentially entail considerable work involved in reviewing actuarial information and making complex entries to amend the position, as well as servicing requests from auditors (who may require an additional fee to cover the costs of the increased workload). Similarly to the above, where the outcome in their particular case is less certain, employers may also need to make disclosures with regards to a possible contingent liability. This will also impact on auditors themselves, who will be subject to a higher level of audit risk when considering their client’s proposed course of action and may need to seek additional technical support when carrying out their work.

Next steps

As set out in PRAG’s report, the majority of schemes are adopting a ‘wait and see’ approach. At present, industry bodies are advocating that the DWP look to introduce legislation which will retrospectively approve amendments which would fall foul of the legislation solely because of the lack of evidence of actuarial approval. Where trustees are confident in the record keeping and governance in place historically at their scheme, it may make sense to keep a watching brief for the time being (though, given the wider interest in the case, inclusion in narrative reporting would be prudent).

Where schemes are aware that the appropriate approval is not in place, or cannot be evidenced, management and trustees should consider engaging with the scheme’s actuary to determine whether there is a possibility of liabilities arising. Auditors should engage early with their clients to understand what action is being taken and prepare for any additional work required.

If you or your firm would benefit from training on this and other pension topics, we have a range of courses to meet your needs, such as:

• Introduction to Pension Schemes
• Pension Scheme Accounts - The Key Issues
• Pension Scheme Accounts - Current Issues and Refresher