The difference between money purchase and defined benefit pensions is apparently well understood. So it may be hard to believe that there is sufficient legal uncertainty in the area for there to be any caselaw. In fact nothing could be further from the truth.
A recent case, Bridge Trustees v Yates & Others, has set the cat amongst the pigeons on this very subject. As a result, some members who thought they had safe money purchase benefits will see their benefits reduced as the scheme winds up in deficit. Whether certain benefits were money purchase or not was crucial because it affected whether those benefits were part of the statutory winding up priority order and where they came in that order.
The scheme in question was of Byzantine complexity but the first question related to self annuitisation. Briefly, did annuitising a money purchase pot into an internal annuity paid from the pension scheme – rather than buying it out with an insurer – stop it being money purchase? The answer was no. But there is a sting in the tail. Once those benefits were in payment they ceased being backed by an identifiable, ring-fenced pot of assets as that pot had been annuitised. As those assets could not be separated out from the scheme’s general resources it meant that on the winding up of the scheme they were included in the statutory winding up priority order, and, as the scheme was in deficit, it meant that these members would have their money purchase benefits reduced.
The case also looked at underpin benefits. The winding up regulations effectively include underpin benefits in the winding up priority order by excluding them from the money purchase definition. The Court held that it made no difference whether the underpin was likely to bite or not. As a result, active and deferred members who think their money purchase pots are safely segregated may well find that on the winding up of the scheme in deficit their benefits will be reduced just because of a DB underpin – in this case because the scheme was contracted out on a GMP basis – that they may not have known existed and which would never realistically bite. It is understood that the DWP may look at changing the regulations to make them fit with their original intention and to prevent any mismatch with the PPF regulations in this area.
The case also held that GMPs were separate benefits. This is potentially controversial and may have an impact on the GMP equalisation debate discussed in our previous briefing.
We understand that this case is to be appealed and we will follow that with interest. In the meantime it is important that all schemes take great care in any statements they make to members about the security of their money purchase benefits. Schemes would be well advised to make sure they are clear as to which benefits are money purchase and which are not. It is not as simple as one might think.