Exploring the impact of the government’s ‘money purchase’ change

This followed the Supreme Court’s July 2011 decision in Houldsworth v Bridge Trustees that concluded it was possible for certain benefits to be within the definition of money purchase benefits despite there being a potential mismatch between assets and liabilities. The DWP immediately announced it would legislate to reverse this decision – with retrospective effect. 

As a result, the incoming pensions act will introduce a new definition of money purchase benefits. This is designed to ensure benefits cannot be regarded as DC if it is possible for a funding deficit to arise in respect of them.

Many schemes offer an option for DC benefits to be converted into a pension income within the scheme rather than externally with an insurer. But benefits with underpins and guaranteed investment returns may also be within scope. Trustees will need to consider their benefit structures to establish whether any benefits will be affected by the new definition.

We are currently waiting for the response to the consultation, which will confirm the direction the government plans to take and the timing of any changes required. We understand the response will be delivered in March 2014.

What does the consultation cover?

Retrospection is the key issue dealt with by the consultation, as the changes to the definition of money purchase benefits under the Pensions Act 2011 are intended to be retrospective to January 1 1997.

But in the October 2013 consultation, the DWP accepted that retrospection to this extent may be difficult to implement as the classification of benefits is crucial to the protections afforded by legislation, such as the availability of the Pension Protection Fund on company insolvency. So, the consultation focuses on whether the changes will be retrospective to 1997 for all areas of legislation protecting member benefits.

Assuming there are no changes to the consultation proposals, schemes previously considered DC but which under the new definition will be regarded as defined benefit, will be required to take the following steps (the first two to apply from the date of the change, the latter two retrospectively):

• Choose an effective date for a scheme funding valuation within 12 months of the changes coming into force;

• Pay PPF levies from 2015/16 (but note that members will not qualify for PPF compensation before April 1 2015);

• Revisit employer debts on any employer exits on or after July 28 2011;

• Apply the new definition for wind-ups which commenced on or after July 28 2011.

Retrospective action

Trustees of affected schemes are required to take retrospective action in two areas – employer debt and wind-ups.

Our main concern with the retrospective proposals is that the government has assumed all schemes have been operating as if the changes to the definition of money purchase benefits were effective from July 28 2011.

Despite the DWP’s statement on the definition of money purchase benefits on July 27 2011 following the Bridge Trustees ruling, in which the legislative aim was stated, the law did not change on that date. Indeed, the act did not receive royal assent until November 3 2011.

At present, the original definition of money purchase benefits, as considered and interpreted by the Supreme Court remains in force. Until the primary legislation and the regulations made under it are in force, it is not possible for trustees to be advised or act definitively. In many cases, trustees have been operating their schemes on the basis of the law currently in force.

Employer debt

Employer debt is the key issue for many clients. The easement that will afford protection in relation to employer debt events that have occurred on or before July 27 2011 is welcome. But it is still intended that the provisions are retrospective to July 28 2011. These provisions would require schemes to have operated on the basis of a law not yet in force.

Helpfully, if certain conditions in the legislation are met, these retrospective debt events will not need to be revisited. However, in reality trustees will only be able to assess whether these statutory conditions are met if they review the debt event. We therefore expect that trustees are likely to feel they need to examine existing employer exits and will need, as a minimum, legal and actuarial advice to do so

Zoë Lynch is a partner at law firm Sackers