On 27 July 2011, the Supreme Court (successor to the judicial committee of the House of Lords) delivered its judgment in Houldsworth, an important case about the meaning of "money purchase benefits". The Court held by a majority of four Justices to one that:

  • guaranteed rates of investment return and bonuses on a member's contributions do not prevent the resulting accrued amount from being a money purchase benefit; and
  • internal annuities (as opposed to the purchase of annuities from an insurance company) provided by a scheme are still money purchase benefits.

The case concerned the meaning of "money purchase benefits" for the purposes of section 73 of the Pensions Act 1995. section 73 sets out the priority order in which benefits have to be secured on a winding-up of a pension scheme, and money purchase benefits are excluded from the pool of benefits that have to be taken into account under section 73. However, the decision is not relevant only for section 73 purposes as money purchase benefits also fall outside the scope of a wide range of pensions legislation designed to protect members' benefits, including that relating to scheme funding, the employer debt and the Pension Protection Fund. It would be prudent for schemes that provide these types of benefits to consider the impact of the judgment.


The case involved the Imperial Home Décor Pension Scheme which began winding up in significant deficit in 2003.

The scheme offered 'MoneyMatch' benefits, which provided a guaranteed notional investment return rather than an actual investment return. The scheme also used members' investment 'pots' to provide a pension which was paid from the scheme ('internal annuitisation'), rather than securing a pension by purchasing an annuity with an insurance company. Actuarial factors were applied at the time of retirement to convert members' investment into pension, in the same way that factors would be applied by an insurance company to calculate the amount of pension payable by way of an annuity.

Proceedings were commenced in 2006 by the independent trustee of the scheme, Bridge Trustees Limited, who asked the Court to determine whether these benefits were money purchase or defined benefit in order to determine how such benefits should be applied under section 73 (as it applied before 6 April 2005).

The High Court held that neither the guaranteed investment returns nor the internal annuitisation prevented the benefits from being money purchase benefits.

DWP's concerns

The DWP was concerned that the effect of the judgment was that some schemes would be regarded as providing money purchase benefits under existing legislation even though funding deficits could arise in respect of them. This would mean that:

  • debts under section 75 of the Pensions Act 1995 would not be payable;
  • schemes providing these benefits would not be covered by the scheme-specific funding requirements; and
  • members would not be protected either by the Pension Protection Fund or the Financial Assistance Scheme in the event of a deficit.

The DWP was allowed to join the litigation after the High Court stage and join in an appeal to the Court of Appeal in order to argue that these benefits were in fact defined benefits. The Court of Appeal, however, upheld the decision of the High Court on the issues of notional investment returns and internal annuitisation. The DWP then appealed to the Supreme Court.

Decision of the Supreme Court

The Court dismissed the appeal by the DWP and held that a matching of assets and liabilities is not a requirement of the statutory definition of a money purchase scheme (and similarly for money purchase benefits), and that the benefits in question were money purchase benefits.

Aon Trust Corp v KPMG distinguished

The Court considered that the Court of Appeal decision in Aon Trust Corp v KPMG [2005] 39 PBLR was correctly decided on its facts but distinguished it. Under the KPMG scheme, defined contributions were paid by or in respect of members, with actuarially-determined formulae under which the amount of pension earned by any member was provisionally ascertainable year by year during a member's service. This was held to be a defined benefit. This is distinct from the application of actuarial factors only at the time of retirement under the Imperial Home Décor Pension Scheme, which constitutes a money purchase benefit.

Lord Walker said:

"KPMG was rightly decided. The use of the actuarial formulae and the width of the clause 8 powers (and the uncertainty as to those powers being exercised either at all, or in any particular way) produced what was on any view too wide a discontinuity between the quantum of a member's total contributions (and the return on them), on the one hand, and the benefits to which the member would eventually become entitled, on the other hand. This conclusion is amply confirmed by (rather than being a consequence of) the deficit of over £70m which had appeared in the closed fund by 2002". (67.)

That said, Lord Walker disagreed with the key conclusion reached in the KPMG case that:

"…'calculated by reference to' means 'calculated only by reference to', in the sense that the benefit in question must be the direct product of the contributions",

on the basis that the legislation did not include the word "only". A guaranteed rate of return on investments did not therefore unhitch a member's eventual benefits from his total contributions. Lord Walker said:

"It follows that the deputy judge (see para 56) above and the Court of Appeal (see para 63 above) were right, in my judgment, to conclude that the GIF mechanism did not unhitch a member's eventual benefits from that member's total contributions. They provided for a yield of guaranteed interest at a modest rate fixed by an objective test, together with the prospect of further bonuses at a modest rate, fixed, again, by an objective test under which the trustees had no discretion. All that is in striking contrast to the much looser terms of the clause 8 powers in KPMG". (73.)

In relation to internal annuities, Lord Walker said:

"In my judgment the deputy judge and the Court of Appeal were also correct in their conclusion that the provision of internal annuities (as opposed to the purchase of annuities from a life office) is not incompatible with money purchase benefits. As the deputy judge put it (para 135) the distinction would produce insupportable anomalies. As the Court of Appeal put it (para 152), annuity tables based on actuarial calculations are used only at the final stage, when the member retires and the amount earned by his or her defined contributions must be converted from a lump sum into an annuity. That is inescapable under either method of provision, in that actuarial tables will be used, on the advice of actuaries, either by the trustees or by the life office (with the latter building in a profit element)." (76.)

DWP statement – legislation now to be expected

On the day the judgment was handed down, the DWP issued a statement recognising that the decision was complex and important and that it would be considering the implications carefully. In its statement, the DWP stated that:

  • In order to provide certainty and to ensure compliance with the Government's obligation under European law, it intended to introduce legislation with retrospective effect at least from the date of the judgment to make clear that benefits cannot be regarded as money purchase benefits if it is possible for a funding deficit to arise in respect of them. (The DWP's concern is that the UK may not properly have implemented the EU Insolvency Directive and the IORP/Pension Funds Directive).
  • The DWP would consider transitional protection in respect of events occurring between the date from which the legislation is effective and 27 July 2011 if, for example, the retrospective change would have adverse consequences for individuals.

The DWP stated:

"Workers who up to now thought their rights were protected have been put in doubt by this ruling of the Supreme Court. In the circumstances, the Government intends to ensure these rights are clarified through retrospective legislation.

Our intention is that the legislation will have retrospective effect at least from the date of the judgment. The legislation 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. The Government will consider transitional protection in respect of events occurring between the date from which the legislation is effective and the date of this statement if, for example, this retrospective change would have adverse consequences for individuals.

This will ensure that the legal definition of money purchase benefits has the meaning that it has commonly been believed to hold. The Government considers that this course of action will better help ensure appropriate protection for pension scheme members".

The effect of the legislation that the DWP intends to enact would be to benefit members (at least in some circumstances).


In his judgment, Lord Walker observed that legislation had been enacted on the basis that there would always be a matching of assets and liabilities in respect of money purchase benefits. Although he acknowledged that there will be exceptions where this is not always the case, Lord Walker expressed the view that the possibility of such cases existing seemed unlikely to amount to an infringement of EEC obligations or to necessitate primary legislation as a matter of urgency. Nevertheless, the DWP has taken the view that legislative changes should be made.

If such legislation is introduced, certain benefits which may have been regarded as money purchase benefits could be treated as defined benefits and therefore increase (or give rise to) liability of an employer to a scheme under scheme funding requirements, section 75 of the Pensions Act 1995, and in respect of PPF levy payments. With this in mind, schemes should be aware that where they now convert a member's money purchase pot into a pension to be paid from the scheme (rather than being secured with a provider by way of an annuity), it is likely that this will, once the DWP legislate, be regarded as a defined benefit pension and not a money purchase pension.

The effect of this legislation will need to be considered when its scope is clarified. As an initial observation, it could affect members adversely in circumstances where a scheme is wound up in deficit and defined benefits are cut back either under PPF legislation or under section 73 or the scheme rules. The DWP may need to consider the possible Human Rights consideration of this. Equally, assets currently (in the light of the Houldsworth decision) held as money purchase benefits would fall outside the PPF levy calculations. The legislation could well increase the levy in some schemes which could impact employers.

Practical Steps

Schemes should:

  1. Identify whether any benefits fall on the side of the KPMG line (and are therefore defined benefits) or fall on the Houldsworth side of the line (and are currently to be categorised, pending DWP legislation, as money purchase benefits).
  1. Keep a watching brief on the DWP legislation and consider responding to any consultation/ draft legislation and/or address its impact.