Pensions Bulletin 2025/07

ICAEW sets out considerations for sponsors and auditors following Virgin Media ruling

The Institute of Chartered Accountants in England and Wales (ICAEW) has published a note of considerations for sponsors and auditors following the Virgin Media ruling handed down by the Court of Appeal in July last year (see Pensions Bulletin 2024/29). The ruling held that amendments made to scheme benefits that affect members’ section 9(2B) rights in defined benefit schemes that were contracted out of the state pension scheme on a salary related basis at any point between 6 April 1997 and 5 April 2016 will be void unless confirmation from the scheme actuary was obtained, in writing, when the amendment was made. 

There is currently much uncertainty within the pensions sector about how the ruling should be reflected in scheme and employer reporting (see, for example, Pensions Bulletin 2025/01). The ICAEW has therefore produced this note – helpfully split into sections discussing in some detail trustee, accounting and auditor considerations - which although positioned as not making recommendations, may well be helpful to sponsors in preparing accounts and discussions with auditors.

The note suggests that trustees are currently considering one of three approaches to this matter - “wait-and-see”, “gather-information” or perform a detailed analysis – and sets out potential justification for each approach.

It then discusses the following three potential accounting treatments under IFRS or FRS102 by sponsoring employers - the choice of which would depend on the approach taken and the specific circumstances of the scheme:

• Do not recognise any amounts or make any disclosure - this is only likely to be suitable for schemes where trustees are confident that the ruling does not apply, such as where the scheme was not contracted out, or did not pass any amendments to scheme benefits during the relevant period, or all the required actuarial confirmations were in place, or the scheme is not material to the sponsor entity. If there is doubt, it may still be appropriate but may be challenged by the auditors.
• Disclose the potential implications of the ruling in the pension note but do not recognise any amounts – this may be appropriate if the situation is not yet clear, but the sponsor decides to make a disclosure around the additional uncertainty over the measurement of the defined benefit obligation.
• Remeasure the defined benefit obligation and recognise a change to the liability – the note suggests that most sponsors are unlikely to be able to recognise such a change at this stage.

The note goes on to suggest that there are then three options for auditors of sponsor financial statements to consider, as follows:

• no impact on the auditor’s report – expected to apply in most cases;
• including an “Emphasis of Matter” paragraph – which may be appropriate where the pension scheme liability is highly significant to the sponsor entity and significant amendments have been made that could create a material future outflow of benefits, but the auditor doesn’t feel that the disclosure in the pension note is sufficiently prominent; or
• issuing a qualified opinion – which the note suggests should only apply in exceptional circumstances such as where the available information suggests a potential material implication to the scheme from the ruling but no legal advice has been sought.

Helpfully the note goes on to say that “… except where there are reasonable grounds to believe that the required process was not followed by trustees at the time when scheme amendments were made, there may currently be no reason to expect that additional liabilities will be incurred because of the ruling. Such grounds would consist of more than just the absence of the confirmation from the actuary. There must be fundamental doubts about the trustee’s historical ability or desire to comply with laws and perform their duty. Therefore, issuing 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 this ruling. Given current uncertainties, this is a high bar.”

IFS calls for automatic consolidation of small pots

The Institute for Fiscal Studies (IFS) has published a report titled "Small pension pots: problems and potential policy responses" addressing the challenges posed by the increasing number of small, deferred pension pots in the UK.

The IFS concludes that the “status quo is not fit for purpose” and that there is a strong case for deferred small pots to be consolidated by default.

Some of the key issues identified in the report are:

• Proliferation of Small Pots: Automatic enrolment has led to many individuals accumulating multiple small pension pots as they change jobs, resulting in deferred pots that are costly to administer and difficult for individuals to manage. The IFS has found that in 2023 there were around 20 million DC inactive pots each worth under £10,000 and in total containing almost £30bn of assets. Considerably over half (12.1m) of these pots were worth less than £1,000, and the number of these pots have grown by almost 2m between 2020 and 2023.
• Administrative Costs: The high number of small, deferred pots is uneconomical for pension providers due to fixed administrative costs, potentially leading to higher charges for savers.
• Challenges for Savers: Managing multiple small pots complicates saving and retirement planning, increasing the risk of individuals losing track of their savings.

The report then goes on to discuss several approaches that would not require member involvement to address these challenges:

• Pot-Follows-Member System: Automatically transferring a member's pension pot to their new employer's scheme when they change jobs.
• Default Consolidator Model: Automatically moving small, deferred pots into large-scale consolidation vehicles or 'superfunds' to achieve economies of scale and potentially better investment returns.

According to the IFS, each approach has its advantages and challenges, although IFS does conclude that “there are definitely advantages to the pot follows member approach” whilst emphasising the need for careful consideration to design a system that balances administrative efficiency with the best interests of savers. The IFS also notes that it believes that “member choice” and “lifetime provider” solutions should only be considered after policies to automatically consolidate deferred small pots have been fully implemented.

Asset owners set out good practices on climate stewardship

A group of asset owners, led by The People’s Pension, Brunel Pension Partnership, and Scottish Widows, has issued an Asset Owner Statement on Climate Stewardship, setting out expectations for asset managers to develop a strategy that “addresses the urgency of action needed on climate-related risks and builds resilience into financial markets”.

The statement, building on existing good practices for asset managers on how to integrate climate stewardship such as the Net Zero Asset Owner Alliance, sets out five principles:

• Industry/market and public policy engagement should be core to the climate stewardship proposition across asset classes;
• Where permissible, asset managers should prioritise collaborative initiatives to achieve greater impact and embed efficiencies in engagement activities;
• Asset managers’ prioritisation framework for company engagement should be rooted in a robust theory of change that delivers maximum impact;
• A systematic approach to voting is imperative; and
• The stewardship function needs to be appropriately resourced.

The statement aims to promote a dialogue on how asset managers can more effectively represent their beneficiaries’ long-term interests and improve efficiencies within the stewardship chain, and ultimately raise the bar on climate stewardship across the investment sector.

The Pensions Regulator sets out expectations for “a year of decisive action” in 2025

In a blog published on 17 February, Nausicaa Delfas, CEO of the Pensions Regulator, outlines its plans over the next 12 months, and reminds pension schemes trustees and their advisors on the regulatory outlook.

Top of TPR’s list of action points is to say more about the need for better data and also to continue to change how the most strategically significant schemes – starting with master trusts – are supervised (see Pensions Bulletin 2024/47).

Additionally, as well as plans to launch the innovation hub (see Pensions Bulletin 2024/40), the Regulator will also progress the joint value for money framework (see Pensions Bulletin 2024/31), issue new guidance to help DB schemes consider the range of alternative models of provision, and set out its future approach to enforcement and tackling serious crimes. The blog also reminds trustees of other ongoing areas of regulatory activities.