The Supreme Court has clarified the dividing line between DB and DC benefits. In a 4-1 majority judgment dated 27 July, Lord Walker confirmed that benefits calculated by reference to payments made by scheme members are money purchase benefits. As such, they fall outside the statutory priority order applicable when a scheme winds up.
Whether the Court of Appeal was correct to hold that certain benefits provided under the terms of the pension scheme were "money purchase benefits" within the meaning of section 181 of the Pension Schemes Act 1993 (PSA 1993).
The Imperial Home Décor Pension Scheme is winding up, with a significant deficit. Legislation requires the trustee to apply the available assets in a specified order of priority. Assets and liabilities of the Scheme that relate to "money purchase benefits", as defined by section 181 of the PSA 1993, are excluded from the order of priority. The trustee of the Scheme made an application to determine whether certain benefits provided by the Scheme were money purchase benefits.
The Secretary of State intervened in the proceedings before the Court of Appeal. He submitted that some of the techniques used to calculate benefits (and, in particular, those applicable to the voluntary investment planning (VIP) and MoneyMatch benefits under the Scheme) took the benefits outside the definition of "money purchase benefits" in section 181(1) of the PSA 1993.
- it is fundamental to the legislation that money purchase schemes are always fully funded, with no risk of the assets being insufficient to meet the liabilities; and
- for that reason alone they are excepted from the statutory order of priority.
Both the deputy judge and the Court of Appeal concluded that neither the Guaranteed Interest Fund (GIF) mechanism nor the provision of internal annuities (as opposed to the purchase of annuities from a life office) was incompatible with money purchase benefits.
Questions Before the Court
The three issues before the Supreme Court were:
- Are MoneyMatch benefits money purchase benefits despite the presence of the GIF mechanism?
- If not, are they money purchase benefits to the extent that they are attributable to contributions and credits not allocated to the GIF?
- Are pensions granted by way of internal annuities regarded as money purchase benefits?
In a 4-1 majority judgment delivered by Lord Walker, the Court dismissed the Secretary of State’s appeal on the first and third questions, holding that an equilibrium of assets and liabilities is not a requirement of the statutory definition of a money purchase scheme (and similarly for money purchase benefits). The second issue was, therefore, irrelevant. Lord Mance gave a separate, dissenting judgment.
The Court affirmed the KPMG case (Aon Trust Corporation Ltd v. KPMG  1 WLR 97), but did say that some of the reasoning used in the Court of Appeal’s decision in that case was open to question. Lord Walker confirmed that the words “calculated by reference to…" in the statutory definition of money purchase benefits do not mean “calculated only by reference to“ member contributions.
We now have confirmation from the Supreme Court that the determining factor in drawing the division between DB and DC benefits is the relationship between member contributions and benefits payable.
- Where, as per KPMG, that direct relationship is broken by the introduction of actuarial factors, benefits will not be money purchase in nature.
- Benefits will, however, fall within the statutory definition if there is a direct relationship between member contributions and benefits payable.
- It is not necessary for benefits to be calculated by reference to direct, actual and only member contributions.
Unfortunately, the Court did not answer the thorny question of how to apply Regulation 13 of the Winding Up Regulations (the Occupational Pension Schemes (Winding Up) Regulations 1996) where there is a single, unappropriated fund that is insufficient to meet all its liabilities for DB and DC benefits.
In Lord Walker’s view, the money or assets to be withdrawn should be the amount or value of the money purchase benefits calculated by the GIF mechanism.