In this month’s Pensions E-Bulletin, we consider the Pensions Regulator’s statement on the importance for trustees of identifying their scheme’s statutory employer and the Supreme Court’s decision on the meaning of “money purchase benefits” in the Bridge Trustees case.
Identifying your statutory employer
The Pensions Regulator has published a statement to help trustees understand the importance of identifying their pension scheme’s statutory employer or employers and how to go about doing this.
The Regulator explains that it is important to identify the statutory employer(s) because “An employer’s legal obligation to support a scheme is the fundamental building block of the pensions framework in the UK and pension protection”. It directly impacts on the trustees’ assessment of the employer covenant, which in turn affects the level of the scheme’s technical provisions and recovery plan. The identity of the statutory employer(s) is also key to the outcome for the scheme in the event of employer insolvency and wind up, including for any scheme which may be assessed for entry to the Pension Protection Fund.
For most purposes, the statutory employer is an employer or former employer of persons in employment related to the scheme. The statutory employer(s) will be the employer(s) legally responsible for:
- meeting the scheme funding objective;
- paying the statutory “section 75” debt when an employer leaves a multi-employer scheme, on scheme wind up or on employer insolvency;
- triggering entry to a Pension Protection Fund assessment period on insolvency.
For most schemes, identifying the statutory employer should be fairly straightforward and it will simply be the employer of active scheme members. However, for schemes which have closed to future accrual or where employers have left the scheme in the past who may not have discharged their statutory liabilities, the position is likely to be more complicated and legal advice may be required in these situations to ensure that all statutory employers are correctly identified.
Where the trustees are unable to identify a statutory employer, they should discuss the position with the contributing employer and inform the Regulator. It is possible for a contributing employer (who does not qualify as a statutory employer) to subsequently become a statutory employer by employing an active member accruing defined benefits in the scheme and this is one possible way of resolving the situation. Depending on the circumstances giving rise to the loss of a statutory employer, it may be that the Regulator will consider using its anti-avoidance powers to ensure financial support is provided to the scheme.
From November this year, trustees will be required to identify their scheme’s statutory employer or employers in the scheme return and so it is important that trustees consider now whether they are clear on the identity of their scheme’s statutory employer(s) and, if not, carry out the necessary investigations required to find out. Even if the current position is clear, the Regulator advises trustees to be vigilant for any change that could separate the scheme from its statutory employer(s), such as an employer substitution or departure or a bulk transfer from the scheme. In these situations, trustees should ensure that any new employer takes on responsibility for the scheme’s liabilities as a statutory employer and ensure that adequate mitigation is received for any detrimental effect caused.
Meaning of “money purchase benefits”
The Supreme Court has handed down its judgement in the case of Houldsworth v. Bridge Trustees and Secretary of State for Work and Pensions, which concerned the meaning of “money purchase benefits”. The Supreme Court, upholding the Court of Appeal’s decision, ruled that it is not necessary for the assets to be the same as the liabilities in order to qualify as a money purchase scheme and decided that:
- even where benefits were subject to a guaranteed rate of investment return in the build up phase, they should still be considered to be money purchase benefits; and
- where schemes used money purchase benefits to provide pensions from the scheme (known as “internal annuitisation”), rather than to purchase annuities from an insurance company, the pensions should be considered to be money purchase pensions.
The Department for Work and Pensions (DWP), who instigated the appeal to the Supreme Court, is unhappy with the decision as it considers that the judgement will leave the UK in breach of its obligations to protect pension scheme members’ benefits under European law. UK law currently offers protection under the scheme funding and employer debt legislation in respect of defined or final salary benefits but not money purchase benefits. Similarly, the protection of the Financial Assistance Scheme and the Pension Protection Fund is not available in respect of money purchase benefits.
As the judgement will result in some schemes being regarded as providing money purchase benefits even where a funding deficit can arise in respect of those benefits, the DWP is concerned that such schemes will now fall outwith these important legislative protections. The DWP has therefore issued a statement advising that the Government will legislate to address this issue.
The legislation will directly counteract the effect of the Supreme Court’s judgement and will make it clear that benefits cannot be regarded as money purchase benefits if it is possible for a funding deficit to arise in respect of any of those benefits. It is likely that this legislation will be retrospective to the date of the judgement. The Government is also considering whether transitional protection may be required in respect of events occurring between the effective date of the new legislation and the date of the DWP’s statement if the retrospective nature of the legislation would have adverse consequences for individuals.
For schemes which had been awaiting the outcome of the Bridge Trustees case for clarity on this issue, a further waiting period will now be required until the new legislation becomes available. We will be issuing a further E-Bulletin when more details on the new statutory position are known.