EWHC 964 (Ch)
In our July 2008 Pensions update we reported on the High Court decision that a revised benefit structure introduced to a defined benefit scheme some years previously contained a money purchase element, ruling against the members who claimed that the top-up benefits were final salary in nature. The scheme in question was, from its inception until 1983, a conventional defined benefits scheme. In 1983, the scheme was restructured to provide lower final salary benefits and contributions but to introduce additional contributions and benefits known as voluntary investment planning (VIP) which were considered to be money purchase benefits. From 1992 until the commencement of the scheme’s winding-up, a further tier of benefit was introduced known as ‘MoneyMatch’. This was also treated as a money purchase benefit. This tier offered a variety of benefits to existing members depending on the number of their ‘membership points’, being an aggregate of their age and years of membership.
In 2003, the principal employer went into receivership and the scheme went into winding-up with a deficit of nearly £40 million. In the light of the scheme deficit, the court was asked to determine which scheme benefits were “money purchase benefits” for the purpose of the application of the priority order under section 73 of the PA 1995.
The defendants, representing the scheme’s members, submitted that none of the MoneyMatch or VIP benefits could be classified as money purchase benefits because of the application of actuarial factors to the members’ interests, the existence of balance of cost provisions and salary related elements.
However, the court held that benefits derived from a member’s MoneyMatch interest or VIP interest were money purchase benefits. Under the scheme rules, members’ MoneyMatch and VIP interests were treated as if they existed as separate accounts which could be combined with other sums from the final salary tier of the scheme. The court held that the application of actuarial factors to members’ interests was not “fatal” to such benefits being money purchase benefits and distinguished this case from Aon Trust Corp Ltd v KPMG  1 W.L.R. 97. The actuarial factors in the Aon Trust case were an integral part of the calculation of the benefits provided under the scheme and could be described as defining the benefits provided. However, the scheme in this case did not include provisions of that type and the extent of the benefit to be provided in respect of each year in which contributions were made could not be determined. Only at the stage at which a pension was selected were actuarial factors used and this was purely to allow conversion. Further, it made no difference whether the trustee secured such benefits by means of “internal annuitisation” or purchased an annuity in the market. The existence of balance of cost provisions was not fatal to the characterisation of MoneyMatch or VIP benefits as money purchase benefits.
This judgment from the High Court has helped to clarify the treatment of defined contribution (money purchase) benefits in the winding-up of hybrid schemes. However, the case has been taken to the Court of Appeal with the hearing scheduled for 8 and 9 June. It is hoped that the judgment will be handed down before the end of 2009.
View the judgment.