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.

Background

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.

The regulations

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.

Comment

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.