There has been an update to the law in respect of the definition of "money purchase benefits" under pension legislation. The update is contained in section 29 of the Pensions Act 2011 (“PA 2011”) and came into force on 24 July 2014. The DWP indicated its intention to bring forward immediate amendments to the Pensions Bill then progressing through Parliament in July 2011 in order to align the definition of "money purchase benefits" in the Pension Schemes Act 1993 (“PSA 1993”) with what it considered to be the commonly understood position of the definition.
The changes have been enacted in section 29(1) of the PA 2011. The provision has amended existing primary legislation to clarify that benefits cannot be regarded as "money purchase benefits" if a funding deficit could arise in relation to them.
In terms of the drafting of the legislation, section 29 has deleted the words "which are not average salary benefits" in section 181(1) of the PSA 1993 and substituted "which fall within section 181B". Section 29(2) of the PA 2011 has inserted a new section 181B into the PSA 1993, providing as follows:
"181B Money purchase benefits: supplementary
- This section applies for the purposes of the definition of "money purchase benefits" in section 181(1).
- A benefit other than a pension in payment falls within this section 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.
- A benefit which is a pension in payment falls within this section
- its provision to or in respect of the member is secured by an annuity contract or insurance policy made or taken out with an insurer, and
- at all times before coming into payment the pension was a benefit falling within this section by virtue of subsection (2).
- For the purposes of subsection (2) it is immaterial if the calculation of the rate or amount of the benefit includes deductions for administrative expenses or commission.
- In this section references to a pension do not include income withdrawal or dependants’ income withdrawal (within the meaning of paragraphs 7 and 21 of Schedule 28 to the Finance Act 2004)."
A "money purchase scheme" is now defined as:
"...a pension scheme under which all the benefits that may be provided are money purchase benefits" (emphasis added).
Under the law as it stood before 24 July 2014, the expression "money purchase benefits" was itself defined 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".
The amended definition enacted by section 29 has retrospective effect from 1 January 1997. So, hybrid benefits no longer count as money purchase benefits, meaning the scheme-specific funding and employer debt framework (alongside the other protection legislation) applies to these benefits, and has done since 1 January 1997. Subject to the transitional measures provided by the Bridge regulations (The Pensions Act 2011 (Transitional, Consequential and Supplementary Provisions) Regulations 2014 and The Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014) affected schemes will need to comply with the legislative and regulatory requirements that apply to non-money purchase schemes. However, the Bridge regulations, in the main and subject to two limited circumstances, do not require trustees to revisit past decisions so that decisions made between 1 January 1997 and the coming into force of section 29 of the PA 2011 will be validated.
Thoughts for Trustees
Trustees need to consider whether their scheme may be affected by the clarified definition of “money purchase benefits”. Affected schemes are more likely to be hybrid schemes and schemes that offer cash balance benefits and/or internal annuities. Where it is determined that a scheme no longer offers money purchase benefits only, that scheme may be subject to different legislative and regulatory regimes, subject to the transitional measures provided by the Bridge regulations.
Trustees should undertake a thorough review of their scheme’s trust deed and rules and seek independent legal advice in order to determine the character of benefits provided by their scheme in light of the clarified definition of “money purchase benefits”. Trustees of hybrid schemes should also consider whether benefits within their scheme that have previously been treated as money purchase benefits continue to satisfy the definition of “money purchase benefits”. Conducting such a review and obtaining the necessary legal advice should assist trustees of affected schemes in complying with the appropriate legislative and regulatory regimes.
Following the review of your scheme, if it is determined that, despite its current or historic treatment as a money purchase scheme, it offers benefits that have the potential to result in a funding deficit (and therefore falls outside the amended definition of “money purchase benefits”), then the Pensions Regulator requires that they are immediately notified so that their records may be updated.