Following the decision of the Supreme Court in Houldsworth v Bridge Trustees, the Government has proposed an amendment to the Pensions Bill to introduce a new definition of money purchase benefits. This will mean that some schemes that were formerly treated as money purchase schemes may in future be required to comply with the statutory funding requirements applicable to defined benefit schemes and to pay the PPF levy. In a second major development, the Government has also proposed an amendment to the Pensions Bill which would enable it to cap the charges that can be levied by qualifying schemes under the new automatic enrolment regime.

New definition of money purchase benefits

In July, the Supreme Court  handed down its judgment in the Imperial Home Décor case (Houldsworth v Bridge Trustees). Eversheds LLP acted for Bridge Trustees in this landmark case, which revolved around the meaning of "money purchase benefits". Rejecting the DWP's argument, that money purchase benefits must be defined so that a money purchase scheme cannot have a deficit, the Supreme Court held that the two benefits in question under the Imperial Home Décor Pension Scheme (i.e. pensions payable by the scheme (by way of internal annuitisation) and benefits with a guaranteed investment return) were money purchase benefits.

In response to this ruling, the Government has put forward an amendment to the Pensions Bill to introduce a new definition of "money purchase benefits". The new definition would mean that a benefit would only be treated as a money purchase benefit where "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".

Pensions in payment would only be treated as a money purchase benefit where they are secured by way of an annuity contract or insurance policy taken out with an insurer and where "at all times before coming into payment" the benefit fell within the meaning of a money purchase benefit set out above.

The Government's priority in introducing this new definition is to ensure that benefits which could develop a deficit cannot be treated as money purchase benefits. This means that some schemes that have formerly been treated as money purchase schemes (but which provide benefits like those under the Imperial scheme which could give rise to a deficit) will now be classed as defined benefit schemes and so are likely to have to comply with the statutory funding requirements applicable to defined benefit schemes and to pay the PPF levy.

Commenting on the proposed new definition of money purchase benefits, Giles Orton, Head of Pensions Litigation at Eversheds LLP (who acted on the Bridge Trustees case) has said:

"The DWP is in a mess. The Bridge Trustees case showed how the law had become confused because the DWP had taken a definition that was originally intended to define benefits, for revaluation purposes, and then used this as the foundation for the pension protection legislation (employer debts, PPF and so on).

The DWP is sensibly trying to find a new definition, in essence benefits and schemes that cannot have deficits, as the basis for exclusions from the protection legislation. However, by continuing to use the same definition of "money purchase benefits" for the pension benefits and the pension protection legislation, the risk is that there will be knock on consequences for benefit definition provisions, and we may see schemes that previously worked well as "money purchase" schemes being required to revalue or pay increases in ways that were never intended or funded for.

So far we have only seen the draft primary legislation, and it may be that the promised secondary legislation to follow will tidy up the loose ends. My concern at present is that the new legislation addresses the symptoms but does not tackle the root cause of the problem. A more thorough rethink by the DWP might make for a tidier long term solution - though the timing of the passage of the Pensions Bill may not allow for this."

Charges cap on qualifying schemes

In another key development the Government has put forward a second amendment to the Pensions Bill which would enable it to cap the "administration charges" that can be levied by "qualifying schemes" for the purposes of the automatic enrolment regime. "Administration charges" are defined widely and include the administrative expenses of the scheme, commission and the use of member's funds "in any other way that does not result in the provision of pension benefits for or in respect of members."

The level of the cap which the Government plans to introduce is not yet known. But this change follows calls by the Workplace Retirement and Income Commission in its final report (which was published in August) for the Government to use its regulatory powers to apply stakeholder charge caps to schemes that will be eligible for auto-enrolment.

Next steps

These amendments will now be debated ahead of the Pensions Bill's third reading in the House of Commons on 18 October 2011.