The Government has finally confirmed that the new statutory definition of “money purchase benefits” will come into force in July. It has also finalised the Regulations which deal with the transition to the new definition.
The new definition means that some schemes will have to change the treatment of benefits which they previously thought were money purchase benefits and will have to comply with scheme funding, PPF levy requirements and the employer debt regime in relation to those benefits. However, the transitional Regulations mean that it will not be necessary to review most past practice.
Money purchase benefits are currently defined in the Pension Schemes Act 1993 as “benefits the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of the member and which are not average salary benefits”.
On 27 July 2011, the Supreme Court gave its judgment in the case of Houldsworth v Bridge Trustees which decided that money purchase benefits could include benefits which did not depend solely on the contributions paid to the scheme. The same day, the Government published a press release saying that it intended to introduce retrospective legislation to ensure that benefits which may create a funding deficit could not be classified as “money purchase”.
Legislation was introduced in section 29 Pensions Act 2011 which will amend the definition of money purchase benefits to say that a benefit can only be a money purchase benefit if “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”.
When the revised money purchase definition is brought into force in July this year, it will have effect from 1 January 1997. This retrospection would clearly cause significant issues for those schemes who have treated benefits as money purchase benefits since 1997 which will not be money purchase under the new definition. As a result, the Government issued draft Regulations last year, which it has now revised, that are intended to deal with actions taken between January 1997 and July 2014.
The key benefits which will be affected by the change are final salary underpins, internal annuities and money purchase arrangements which provide for some form of guaranteed rate of return.
Where a final salary underpin is provided, the Regulations say that benefits will remain money purchase benefits until the underpin bites.
Generally speaking, wind-ups commenced before the new Regulations come into force or decisions in relation to section 75 debt calculations will not need to be revisited and the treatment of certain benefits as money purchase benefits will not need to be unravelled.
Trustees need to consider whether any benefits under their scheme are impacted by the new definition of money purchase benefits and, if so, consider what changes to current practice are required going forward. In addition, they need to confirm that the transitional Regulations, which are long and complex, mean that past actions do not need to be revisited.
The response to consultation can be viewed here.