Following the Supreme Court's judgment in Houldsworth and another v Bridge Trustees Limited and another (see our pensions e-bulletin of 2 August 2011, an important case regarding the meaning of "money purchase benefits"), the Government has laid amendments to the Pensions Bill 2011 to amend the definition of "money purchase benefits" under pensions legislation (see here).
Under the amended definition, benefits cannot be regarded as money purchase benefits if it is possible for a funding deficit to arise in respect of those benefits. Under the restricted definition, "money purchase benefits" are to be calculated solely by reference to assets in such a way that no deficit can arise in respect of them. Therefore, hybrid type benefits that were analysed in Houldsworth v Bridge will not amount to "money purchase benefits" under the revised definition but will instead be treated as defined benefits. Consequently, the scheme-specific funding regime, the employer debt legislation and the PPF would apply to such benefits.
Decision of the Supreme Court
The Supreme Court held by a majority of four Justices to one that:
- guaranteed rates of investment return and bonuses on a member's contributions do not prevent the resulting accrued amount from being a money purchase benefit; and
- internal annuities (as opposed to the purchase of annuities from an insurance company) provided by a scheme are still money purchase benefits.
The DWP was concerned that the effect of the judgment was that some schemes would be regarded as providing money purchase benefits under existing legislation even though funding deficits could arise in respect of them. In practice this would mean that:
- debts under section 75 of the Pensions Act 1995 would not be payable;
- schemes providing these benefits would not be covered by the scheme-specific funding requirements; and
- members would not be protected either by the Pension Protection Fund or the Financial Assistance Scheme in the event of a deficit.
The Government's response to the Supreme Court's decision is to introduce amendments with a view to achieving certainty, maintaining appropriate protection for scheme members' benefits and complying with obligations under European law (EU Insolvency Directive and the IORP/Pensions Funds Directive). The Government stance is that "the term 'money purchase benefits' should only refer to benefits where there is no risk of a funding deficit. That is why the legislative protections for benefits such as final salary benefits do not apply to money purchase benefits." In light of the judgment in Houldsworth v Bridge, there was a risk that schemes would be unable to pay those benefits and to exacerbate matters, they may not be eligible for PPF compensatory benefits. Additionally, the DWP expressed concerns that the judgment could lead to uncertainty about how trustees of schemes should distribute assets in a wind-up scenario (under section 73 of the Pensions Act 1995 money purchase benefits are excluded from the statutory priority order). To address these concerns, the Government has laid four amendments to the Pensions Bill.
Amendments to the Pensions Bill
The amendments will render the judgment in Houldsworth v Bridge academic. Specifically, the amendments will:
- amend the definition of "money purchase benefit" so that it only includes those benefits which cannot develop a deficit in funding;
- provide powers to make consequential or supplementary changes;
- provide powers to make transitional provisions to deal with special cases so that members are not adversely affected; and
- provide a power to amend the definition of "money purchase benefit" further.
The amendments will have retrospective effect to 1 January 1997. The DWP states this is to ensure that, "all schemes that have wound up since the Pensions Act 1995 came into effect, and particularly all schemes that have qualified for help from the Financial Assistance Scheme, can be treated fairly and consistently." Given that the definition of "money purchase benefit" features frequently in legislation, the Government has stated that it may be necessary to amend other legislation so that it is compatible with the revised definition.
Transitional provision has also been inserted where past decisions cannot be revisited such as decisions in respect of completed wind ups. Additionally, the Government proposes to consult on subordinate legislation making consequential and transitional amendments in due course.
The Government's amendments restrict the definition of "money purchase benefits" to benefits calculated solely by reference to assets in such a way that no deficit can arise in respect of them. As such, the boundaries between defined benefits and money purchase benefits would be clearly demarcated. The definition of "money purchase benefits" has been the subject of several cases in recent years and the clarification should be welcomed. In essence, if a deficit can arise in respect of any benefit it does not constitute a money purchase benefit. The amendments effectively reverse the Supreme Court's decision in Houldsworth v Bridge Trustees Limited. However, the parties to that judgment will still be bound by it.
Certain benefits which may have been regarded as "money purchase benefits" (following the decision in Houldsworth v Bridge Trustees Limited) will now be treated as defined benefits and therefore increase (or give rise to) liability of an employer to a scheme under the scheme-specific funding requirements, section 75 of the Pensions Act 1995 and in relation to levy payments due to the PPF. Accordingly, employers and trustees alike should consider the type of benefits that are provided under their pension schemes to ascertain whether they fall within the scope of the restricted definition or not. For benefits that are outside the restricted definition, they will now be covered by the scheme funding regime and trustees will need to account for these benefits in the triennial valuation process. In the event that there is a deficit, employers will need to eliminate that deficit under the recovery plan. In such circumstances, the PPF levy would apply and members may benefit from PPF compensatory benefits in the event of insolvency of the employer and the scheme being eligible for PPF entry.
For members with benefits that fall within the definition of money purchase benefits, their benefits will continue to be safeguarded in the event of a winding-up as under section 73 of the Pensions Act 1995 money purchase benefits are excluded from the pool of benefits that have to be taken into account when applying the statutory priority order.
The Government has acknowledged that trustees and managers of pension schemes may well have had a different understanding of the definition of money purchase benefits in the past and as such, the Government will provide powers to make transitional provision where historic decisions cannot be revisited. However, the scope of such provision is not known at this stage and the devil will be in the detail. The retrospective effect of the legislation could create difficulties for schemes where, for example, it has been assumed that money purchase benefits are provided and in turn, the employer has assumed that it has no liability to fund those benefits only to find that it is now liable to fund those benefits.
It should also be noted that schemes that convert a member's money purchase pot into a pension to be paid from the scheme (as opposed to being secured with a provide by way of an annuity), may be excluded from the definition of "money purchase benefit" as there may be a shortfall between the lifetime cost of paying that pension and the value of the rights accumulated by the member. Where these promises are backed by insurance or annuity policies held in the name of trustees, they should fall within the restricted definition.
The Pensions Bill 2011 had its report stage and third reading on 18 October 2011 and we shall continue to monitor the progress of the Bill and keep you abreast of any further developments.