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Money purchase benefits redefined


The DWP has begun a consultation exercise on proposals for a revised definition of ‘money purchase benefits’


O


The Pensions Faculty


in association with


n 27 July 2011, the UK’s Supreme Court ruled that, under the pensions


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legislation as it stands currently, benefits remain ‘money purchase’ even when guarantees such as notional investment returns apply prior to retirement, or when the scheme pays members’ pensions from its own resources rather than securing the income by purchasing annuities. As Lord Walker’s leading judgment concluded, “equilibrium of assets and liabilities is not a requirement of the statutory definition of a money purchase scheme”. In other words, a ‘money purchase scheme’ could experience a funding deficit. The degree of consternation this caused the government was demonstrated by the announcement by the Department for Work and Pensions (DWP), on the same day as the judgment, of its intention to change the law to ensure that ‘money purchase benefits’ cannot encompass cases where a risk of deficit arises. Provisions intended to achieve that goal were duly included in the Pensions Act 2011. As a consequence, benefits will be money purchase when, and only when, their amount is determined solely


by the available assets; and if, when put into payment, the pension in payment is secured by an annuity contract or insurance policy. (In this context, income withdrawal is not considered to produce a pension, so money purchase schemes will still be able to offer ‘drawdown’.) In other words, the member’s benefits must be limited to what can be purchased using his or her ‘pot’ of invested contributions. This means that some schemes that were previously considered to be ‘money purchase’ schemes will no longer be viewed as such, and as a consequence may require to behave like defined benefit schemes – introducing (for example) valuation requirements and Pension Protection Fund (PPF) levy implications. It is expected that the revised definition will be activated on 6 April 2014, although it will be effective from 1 January 1997. The amending legislation gives the DWP wide powers to manage the transition to the new definition and to make any other changes to legislation that are necessary. The current consultation exercise is about regulations drafted for this purpose. They are lengthy (55 pages long) and


...the member’s benefits must be limited to what can be purchased using his or her ‘pot’ of invested contributions


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