Legislation will shortly be brought into force to narrow the definition of money purchase benefits, with retrospective effect from 1 January 1997. Trustees of money purchase and hybrid pension schemes should urgently consider whether the money purchase benefits they offer are guaranteed beyond the assets invested in the scheme and the impact this change could have on scheme decisions made in the past, present and future.
Acknowledging the potential difficulties for schemes operating from 1997 onwards on a money purchase basis which do not now satisfy the new definition, the DWP has consulted on draft transitional regulations providing relief to affected schemes. The transitional regulations provide that, in most instances, scheme decisions made prior to 28 July 2011, the date of the Supreme Court judgment in the Houldsworth vs Bridge Trustees Ltd case, will not require revisiting. The draft legislation assumes that the new definition and the transitional regulations will be brought into force on 6 April 2014, although we are still awaiting the Government’s response to the public consultation.
Having reported on the change to the definition of money purchase benefits in Pension Update 07/11 (October 2011), we now wish to update you further on the issue, by detailing some of the proposed key transitional protections offered to affected schemes.
Key transitional protections being introduced include:
- Revaluation of deferred benefits – For benefits already in payment prior to April 2014 and revalued on a money purchase basis, there will be no requirement to revisit benefit calculations, even if those benefits can no longer be classed as money purchase. This transitional provision will avoid the need for schemes to review historic members’ deferred benefit revaluations. If a member accrues benefits both prior to and then on or after 6 April 2014, the revaluation method applied to the accrued benefits may be split between the money purchase method and the flat rate method (now renamed the “cash balance and flat rate method”).
- Indexation of pensions in payment – Schemes which have treated benefits as money purchase for indexation purposes will not be required to revisit existing pensions in payment. Statutory increases applied to non-money purchase benefits will also not attach to affected pensions. To benefit from this easement, trustees must have treated the benefits as money purchase, the scheme rules must not require indexation of the pension and no discretionary increase should have been applied.
It appears that this transitional provision will not be available to schemes which have provided a discretionary increase, whether in response to the DWP’s statement on the Bridge decision or otherwise, and annual statutory indexation may apply to such pensions in payment. We are aware that the treatment of benefits post-Bridge has been raised in the consultation process and await a response.
Scheme funding – Scheme funding regulations, which subject defined benefit schemes to a strict funding regime with actuarial valuations at least every three years, will not apply retrospectively to schemes trfeated as money purchase prior to 6 April. Schemes affected by the new legislation will therefore not have to undertake or revisit scheme funding valuations for past periods.
For schemes affected by the new definition, funding requirements will apply with effect from the commencement of the legislation. As a consequence, some schemes may need to produce an actuarial valuation for the first time. Trustees of such schemes will be required to produce an actuarial valuation with an effective date within one year of April 2014 and scheme funding documentation must be put in place within 15 months of the effective date.
Winding up – For non-money purchase schemes, statutory provisions are imposed on winding up which set a priority order by which liabilities must be discharged if full liabilities cannot be met. No such provisions apply for money purchase schemes. The transitional regulations provide restricted relief to schemes which have wound up on a money purchase basis but which do not now fall within the money purchase definition.
Subject to some conditions, schemes wound up prior to 28 July 2011 on a money purchase basis will not be required to revisit decisions taken. A scheme commencing winding up on or after 28 July 2011 on a money purchase basis can continue to do so, provided that the winding up is completed prior to 6 April 2014 and benefits are secured in full. If benefits cannot be secured in full, the winding up will be required to be reviewed. The new definition of money purchase benefits must be applied to schemes winding up on or after 28 July 2011 which do not complete the process by 6 April 2014.
Employer debt – From 6 April 2014, benefits no longer falling within the definition of money purchase will require to be included in any employer debt calculation. An employer debt event occurring prior to 28 July 2011 will not require revisiting if benefits were treated as money purchase and such liabilities can be met in full. Schemes will have to recalculate any employer debt occurring on or after 28 July 2011 as soon as reasonably possible, subject to limited exceptions, with the trustee required to instruct an actuary to recalculate the debt, taking into account benefits affected by the new definition which had previously been excluded from the debt calculation.
Multi-employer schemes which have entered into a scheme apportionment, flexible apportionment or withdrawal arrangement between 28 July 2011 and 6 April 2014, must revisit the arrangement as soon as reasonably possible to determine whether the funding test can still be met when the additional liabilities are included in the liabilities of the scheme.
PPF levy – Schemes affected by the new legislation will be subject to the PPF levy. The transitional regulations afford a one year transitional period to allow newly affected schemes time to prepare.
While the transitional regulations will provide some relief when they come into force, there are limits both in the scope of the provisions and the period of time for which they can be relied upon. Trustees of schemes affected by the new legislation will have to act quickly to both assess whether previous scheme decisions made will require reconsideration and to implement future changes to their scheme.