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When is a money purchase benefit not a money purchase benefit? New Regulations from the DWP tackle the issue.
On 6 May, the Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014 (the Regulations) were published.
The Regulations implement the new statutory definition of money purchase benefits, which is set out in section 29 of the Pensions Act 2011.
The Regulations are due to come into force in early July, having now been laid before Parliament.
On the same date, the Government Response (the Response) to the October 2013 consultation on the Regulations, was also published.
Consultation and Response
The Regulations have been eagerly awaited by the pensions industry given their importance in determining both the past and future treatment of money purchase benefits in occupational pension schemes. This is, therefore, a development relevant to trustees and employers with any money purchase benefits in their schemes.
By way of a reminder, the background to the legislative change is set out at the end of this Alert.
In the lead up to the publication of the Regulations, there was a high level of engagement by the DWP with the pensions industry - with the main issues being (i) what action is proportionate and appropriate to protect member benefits and comply with European law (ii) the degree of retrospection of the Regulations (iii) recognition, given applicable case law, that there was inconsistent treatment in the past sometimes of money purchase benefits by trustees and employers and (iv) how best to deal with "hybrid" scheme benefits such as underpin and top-up benefits.
Fortunately, the DWP has taken on board the majority of concerns expressed by the pensions industry, in particular, as regards the practicalities of implementation.
Impact of the Regulations - preliminary view
As the Regulations run to 57 pages and the Response document is a similar length, we are reviewing the detail to assess the impact of the Regulations fully. However, from our preliminary review, it appears that:
• the Regulations will potentially affect any occupational pension scheme which has, or has had, money purchase benefits. However, in practice, we would expect schemes to be most affected if they are hybrid in nature (i.e. a mixed defined benefit and defined contribution scheme) and/or where they have some cash balance, benefit
underpin or guarantee or option to annuitise a money purchase account within the scheme;
• the new, narrower statutory definition of money purchase benefits will apply such that, after implementation, a money purchase benefit is one where there cannot be a possibility of a funding shortfall in relation to it (i.e. where the assets "must necessarily suffice" to cover the benefit);
• the Regulations cover both member protection provisions (e.g. scheme funding, employer debt, wind-up, eligibility for the Pensions Protection Fund etc.) and member benefit provisions (e.g. scheme amendment; revaluation, indexation and preservation, transfers and disclosure etc.);
• new terms are introduced in the Regulations (e.g. cash balance benefit) to assist in ensuring that the formerly wide range of money purchase benefits are identified so that their treatment can be made clearer;
• the Regulations nominally apply to all pensions legislation from 1 January 1997 - the date which the Government views as the earliest date on which there was a reference to money purchase benefits in the legislation;
• helpfully, due to the specified easements, most of the changes will be implemented prospectively from the date that the Regulations come into force (which is expected to be early July 2014);
• in addition, there are some specified transitional periods to allow on-going schemes time, from the coming into force date, to implement the new requirements in respect of benefits which now fall outside the new, narrower definition (e.g. in relation to the conduct of actuarial valuations and calculation of PPF levies);
• also helpfully, there are provisions to validate historic scheme practices prior to the coming into force date;
• there are limited circumstances where a scheme will be asked potentially to revisit past decisions. This affects primarily some calculations of statutory debt (under section 75 Pensions Act 1995) and scheme wind-up, where there remains a solvent employer and trustees/employers have treated as money purchase benefits those benefits which fell outside the then legal requirements applicable to money purchase benefits as set out in statute and by case law;
• it is unclear whether the Treasury will use the same definitions as set out in the Regulations as regards the recently announced Budget 2014 changes.
What might this affect?
The changes introduced by the Regulations will potentially have an impact in many areas, including:
• money purchase underpin benefits and top-up benefits;
• protected rights;
• scheme modifications;
• scheme wind-up;
• employer debt and other funding deficiencies;
• revaluation, indexation and preservation;
• transfer payments; and
• Pension Protection Fund entry.
What action should be considered now by trustees/employers?
We would expect employers and trustees to consider the following:
for ongoing schemes:
• understand what money purchase benefits are currently being provided under their schemes (e.g. is the scheme primarily defined benefit with some money purchase additional voluntary contributions or does it include options to secure money purchase accounts by means of an internal annuity? Does the scheme provide cash balance benefits, accounts with a notional or guaranteed rate of return, any DC underpin benefits or defined benefit with a money purchase top-up etc?);
• confirm if the treatment of these benefits must change for the future, from coming into force date, and, if so, whether any consequential rule changes are required;
• confirm if the past treatment of these benefits is validated by the Regulations;
• confirm any change of administration practices and discuss with scheme administrators;
for schemes that are in wind-up/will be in wind-up before the coming into force date
• confirm, by reference to the date of commencement of wind-up, whether the treatment of benefits accords with the validations set out in the Regulations.
Background to the change in legislation
Money purchase benefits are treated differently to defined benefits under the pensions legislation (e.g. as regards funding, employer debt and priority of treatment on wind-up), so it is important to know what is the classification of a benefit.
The current, unamended, definition of money purchase benefits (and money purchase scheme) is set out in section 181 of the Pensions Schemes Act 1993.
The existing definitions have been interpreted by case law (Aon Trust Corporation Ltd v KPMG and others, 28 July 2005, Court of Appeal and Houldsworth and another v Bridge Trustees Ltd and another, 27 July 2011, Supreme Court).
In the Bridge case it was held that an "equilibrium of assets and liabilities is not a requirement of the statutory definition of a money purchase scheme". So, certain benefits of a hybrid nature, for example a defined contribution account which included a notional investment return, or an underpin, could still be classified as a money purchase benefit (with the judgement in Aon being distinguished by the Supreme Court). In addition, if a defined contribution "pot" was used to purchase an internal scheme annuity, this did not prevent the pension from being treated as a money purchase benefit.
The Bridge decision, in which the DWP (Secretary of State) was the Appellant, led the Government to decide to legislate. It was keen to act so that it could show compliance with European legislation, namely Article 8 of the Insolvency Directive and Articles 15-17 of the European Pensions Directive. It issued a Statement, on 27 July 2011, saying that it intended to legislate retrospectively to ensure that a money purchase benefit could not be classified as such
unless there was no possibility of a shortfall of assets relative to the liabilities of the benefit (i.e. an equilibrium of assets and liabilities in respect of the benefit).
The Government then included section 29 of the Pensions Act 2011 to effect the change in the existing statutory definition, albeit that there were also wide powers reserved to introduce transitional, consequential and supplementary provisions.
In October 2013, the Government issued a consultation together with draft regulations. In the draft regulations, and given the July 2011 DWP Statement, many of the provisions of the Regulations were intended to be effective from 28 July 2011 - the date when the Government had first announced that it would legislate to change the existing money purchase definition.
As can be seen from the Regulations and the Response, the Government was persuaded to drop this implementation date given that the Statement did not have force of law. So the upshot is that the changes are nominally effective retrospectively from 1 January 1997, but will mostly apply in practice only from the date upon which the Regulations come into force (anticipated to be early July 2014). > Back to Top
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