Issue 49
April 2014
Money purchase benefits definition
A new definition of ‘money purchase benefits’ is expected to come into force, possibly as early as 6 April 2014, so that only benefits that cannot give rise to a funding deficit are classed as money purchase
T
he revised definition will mean that some schemes that were previously considered to be money purchase may no longer be regarded as such.
Background On 27 July 2011, the UK’s Supreme Court ruled (by a 4:1 majority) that, under the pensions 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 that this caused the Government was demonstrated by the Department for Work and Pensions’ (DWP’s) announcement, 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.
The new definition
Provisions were included in the Pensions Act 2011 to amend the statutory definition so that a benefit will only be treated as money purchase if “its rate or amount is calculated solely by reference to assets which (because of the nature of the calculation) must necessarily suffice for the purposes of its provision to or in respect of the member”. A pension in payment will only be a money purchase benefit if the benefit was ‘money purchase’ (under the new definition) before it came into payment, and it is now backed by an annuity contract or insurance policy held
by the trustees.
Once brought into force, the new definition will have retrospective effect from 1 January 1997, but its impact will be softened by transitional arrangements (discussed below), which were the subject of a recent consultation exercise. The Government had intended to bring the new definition into force on 6 April 2014, although it remains to be seen whether that target is retained after consideration of the consultation responses.
...the new definition will have retrospective effect from 1 January 1997...
Implications
Benefits that might previously have been regarded as money purchase may no longer meet the definition and will be reclassified as defined benefits, retrospectively, from 1 January 1997. This will relocate the schemes concerned within range of, for example, the statutory funding obligation, the employer debt requirements, and the Pension Protection Fund (PPF) levies schemes likely to be affected are those that provide a guarantee in the accumulation phase (including, for example, a guaranteed interest rate, investment return or a promise of an amount linked to salary), and those that convert money purchase funds into a scheme pension that is not secured by an insurance policy. (In this context, income withdrawal is not considered to be a pension, so money purchase schemes will still be able to offer ‘drawdown’).
Transitional arrangements The DWP is currently considering responses to draft Regulations containing transitional provisions relating to the new definition. The Government’s intention is that the transitional provisions will remove
the requirement for schemes to revisit decisions made during the period from 1 January 1997 to 27 July 2011 (i.e. the date of the DWP’s statement in response to the Supreme Court ruling). The draft Regulations seek to ease the transition in other ways, for example by providing that: l the trustees of affected schemes have until 6 July 2014 to appoint a scheme actuary l the statutory funding obligation will not apply prior to 6 April 2015 to a scheme that ceases to be considered money purchase as a result of the revised definition, but that thereafter scheme funding documentation (e.g. statements of funding principles, actuarial valuations, and schedules of contributions) will have to be produced as if the scheme was newly established as a defined benefit scheme on that date – the scheme’s schedule of payments will remain in effect until the first schedule of contributions is put in place, and l a scheme that meets the PPF eligibility criteria for the first time as a result of the revised definition will have to submit a ‘section 179’ actuarial valuation by 31 March 2015 (with an effective date falling in the preceding three-month period), and will become eligible for the PPF (and liable for its levies) on 1 April 2015. The outcome of the consultation and the final regulations are still awaited. Trustees should consider whether their schemes will be affected by the new definition, when it comes into force, and the action that may be required. If the transitional provisions work as intended, there should be no need to re-open decisions taken before 28 July 2011. The DWP’s plan was to bring the legislation into force on 6 April 2014, but its consultation paper was long and complicated and will have elicited long and complicated responses.
The magazine of The Pensions Faculty produced in association with Hymans Robertson LLP
Page 1 |
Page 2 |
Page 3 |
Page 4