The Department for Work and Pensions (the “DWP”) has published the long-awaited final version of the regulations implementing the new statutory definition of “money purchase benefits”. The finalised regulations will require trustees to revisit past decisions in far fewer areas than draft regulations published last year suggested, and as a result very few schemes will need to revisit past decisions. The new definition nonetheless will have a significant impact going forwards for schemes with benefits that are recategorised. The new definition is expected to come into force this July.
In July 2011, the Supreme Court gave its decision in the case of Houldsworth v Bridge Trustees. The case considered, among other things, the status of:
- defined contribution benefits where the scheme had prom- ised a guaranteed rate of return which was not matched by a corresponding investment; and
- money purchase benefits which had been converted into a pension paid from the scheme but were not matched by a corresponding annuity bought from an insurer,
and in particular whether they counted as defined benefits or money purchase benefits under relevant legislation. Although the case was concerned with a winding-up, in principle the decision was relevant for other statutory purposes too: tax aside, the same definition of “money purchase” is used throughout pensions legislation.
The DWP had argued in the case that benefits should count as money purchase only if the scheme’s benefits liability is automatically matched by corresponding assets. However, the Supreme Court disagreed. It decided that in both cases the benefits were money purchase benefits because their amount was calculated by reference to contributions previously paid, even though there was no necessary exact match between the size of the benefit and the assets the scheme held to secure them.
On the same day as the Supreme Court decision, the DWP announced its intention to change the statutory definition of money purchase benefits retrospectively, with effect from 1997, to say that until it comes into payment, a benefit can be money purchase only if it is not possible for a deficit to arise in respect of it. Moreover, if a scheme provides pensions internally, when money purchase benefits come into payment, those pensions will count as money purchase only if they are secured through policies bought from an insurer. In other words, under the new definition which was subse- quently enacted in s29 Pensions Act 2011 (“s29”), liabilities count as money purchase only if they are necessarily matched by the assets held to meet them.
To date, s29 has not been brought into force. The DWP carried out a lengthy period of stakeholder engagement to help it decide how to implement the new definition in light of its retrospective application. In late 2013, it consulted on draft regulations which, while providing for a number of easements, would still have required schemes to revisit some past decisions, in particular in relation to employer debt.
Section 29 will come into force when the regulations receive Parliamentary approval (expected to be in July 2014 – the “implementation date”), and will have effect from 1 January 1997. As a result, some schemes with benefits that were previously thought to be “money purchase” will be considered to have held non-money purchase benefits since that date.
In contrast to the consultation draft, the finalised regulations provide easements which will stop such schemes having to revisit the majority of decisions made about those benefits in the period between 1 January 1997 and the implementation date. Generally speaking, the only past decisions that schemes will need to revisit are employer debt calculations in two very limited circumstances which are unlikely to affect most schemes.
From the date when Parliament approves the regulations, schemes will need to be administered on the basis that any benefits which fall outside the new definition are defined benefits. While in the main this should not create significant problems for schemes, on a literal reading the regulations may have some unwelcome implications for the indexation of money purchase pots that are converted into pensions without the scheme buying a matching annuity. We under- stand that there was no intention to make schemes provide increases on such pensions, but we are exploring the issue with the DWP.
Schemes which are have previously been considered to be wholly money purchase, but which hold benefits that fall outside the new definition, will be subject to a range of new requirements going forwards. Among other things, they will need to:
- appoint a scheme actuary by 6 October 2014;
- carry out an actuarial valuation and agree a schedule of contributions and, if necessary, a recovery plan within 15 months of the valuation’s effective date (the effective date must be within 12 months of the implementation date); and
- submit a Pension Protection Fund (“PPF”) valuation by 31 March 2015 and start paying the PPF levy with effect from the 2015/16 levy year (they will be eligible for PPF entry with effect from 1 April 2015).
However, we understand that the DWP does not intend to change some existing easements which, for example, allow schemes to count as “money purchase” for the purposes of the scheme funding legislation if the only defined benefit they promise is a lump sum on death in service which is matched by an insurance policy. If a scheme is “money purchase” in all other respects, in other words, the existence of an insured lump sum death-in-service promise will not make it a defined benefit scheme for funding purposes.
Since the DWP announced its intention to change the definition of “money purchase benefits” with effect from 1997, the pensions industry has been united in its attempts to persuade the DWP of the need to mitigate the impact of a retrospective application of the definition. The consultation draft of the regulations, which envisaged a certain level of retrospection, indicated that the DWP had not been fully persuaded. The fact that the final regulations will require far fewer past decisions to be revisited is therefore to be welcomed.
However, the new definition will apply in full from the implementation date, and benefits under many schemes will be recategorised as a result. Those schemes with benefits which they currently treat as money purchase, but which will become non-money purchase under the new definition, will need to start preparing for July 2014. Given that there are only a couple of months until then, schemes would be advised to consider whether they hold any benefits which will be recategorised in light of the new definition and, if so, what action they to need to take in relation to them – possibly as regards PPF and scheme funding requirements, but also perhaps in relation to revaluation, indexation and transfers.