Virgin Media: What does it mean for auditors?

In our previous legal update, Pension challenges impacting professional indemnity insurers, we explored how the recent Virgin Media case and ongoing actions related to the Boots Pension Scheme could potentially increase claims against pension professionals, including actuaries, solicitors, benefit consultants, and trustees. In this article, Harriet Quiney examines this significant decision from a different perspective, focusing on its implications for auditors.

Background

The Court of Appeal decision in Virgin Media Ltd v NTL Pension Trustees II Ltd & Ors [2024] EWCA Civ 843 (‘Virgin Media’) clarified the circumstances in which actuarial confirmation by way of s37 certificate is required for rule changes relating to contracting out of the additional state pension made between 6 April 1997 and 5 April 2016, when contracting out was abolished.  

In summary, the decision held that without confirmation in writing, such rule changes would be void. 

In practice, many pension scheme trustees are now unclear as to how their governing documents should be interpreted and will, if certain amendments are found to be ineffective, have potentially been administering their schemes incorrectly for over 25 years.  It is likely that further rulings will follow as, for example, it is unclear whether, absent a certificate, whole amendments will be deemed invalid or just the parts that relate to contracting out.

ICAEW guidance

In February 2025, the Institute of Chartered Accountants in England & Wales (ICAEW) provided guidance on the implications of the Virgin Media judgment for pension scheme sponsoring employers and their auditors.  Bearing the current uncertainty in mind, the ICAEW states that its members must consider what impact (if any) the Virgin Media ruling has on auditors' risk assessments and planned procedures, as well as in the auditor’s report.  In particular, most sponsors will not know at this time whether a re-measurement of the defined benefit obligation will be needed or, if it is, how the liability will change, and they may need to make a disclosure around the uncertainty in their accounts.

Implications

As we are almost 10 months from the ruling, the clock is ticking in terms of making appropriate disclosures in annual accounts and auditors should be in contract with scheme sponsors in order to determine what approach to take.  Legal advice taken by trustees may not always be shared with sponsors or auditors and auditors should be asking sponsors if they are intending to obtain their own legal advice or to discuss with trustees how much of their advice can be shared. Although trustees may not have performed a detailed investigation, in most situations they should at least have considered the position. These considerations may provide some idea of whether their scheme is likely to be affected, which can then help to direct the audit response.

If the auditor concludes that the ruling is unlikely to apply to the scheme or if the scheme liabilities are immaterial then there may be no impact on the auditor's report. Equally, if the trustee or sponsor has been able to make a reliable estimate of the impact of the ruling and recognise this in the financial statements, there is also unlikely to be an impact.  But in most cases, scheme liabilities will be material, the ruling will apply and trustees will either be following a wait-and-see approach or will not have completed their investigations.  In these situations, auditors should consider whether the potential effect of the ruling has been appropriately reflected in the sponsor financial statements through either disclosure or a re-measurement of the defined benefit obligation.

If an auditor considers that the financial statements do not adequately reflect the issues raised by the ruling, it should discuss these concerns with the sponsor in an attempt to resolve the issue. If no agreement can be reached, then the auditor may wish to consider whether there should be an impact on the auditor’s report.

While this will vary from case to case, the ICAEW considers that Key Audit Matters and Emphasis of Matter paragraphs are unlikely to be required.  Similarly, the ICAEW suggests that a qualified audit report may not be a proportionate response unless it seems probable that a scheme will have additional material liability to pay benefits as a result of the ruling and there are fundamental doubts about the trustee’s historical ability or desire to comply with laws and perform their duty. Given current uncertainties about the impact of the ruling, the ICAEW suggest that this is a high bar.

While this should be of some comfort, auditors will ignore the Virgin Media decision at their peril.