Exploring the impact of the new money purchase definition

The Supreme Court’s July 2011 decision in favour of Bridge Trustees concluded that it was possible for certain benefits to be within the definition of money purchase despite there being a potential mismatch between assets and liabilities.

The DWP immediately announced it would legislate to reverse the effect of this decision, with retrospective effect, by introducing a new definition of money purchase benefits.

Retrospection is the key issue dealt with by the regulations, as the changes to the money purchase definition in section 29 of the Pensions Act 2011 are expressed to be retrospective back to January 1 1997. 

The original consultation would have required trustees to revisit certain decisions taken in relation to winding-up and employer debt after July 27 2011 (the day after the Supreme Court’s decision).

But the DWP changed its position when issuing the final regulations. 

What do trustees need to do?

This means that, except in very limited circumstances, trustees will not need to revisit any decisions taken prior to the regulations coming into force. 

However, certain actions will need to be taken by those trustees with affected benefits within the timescales set out:

• As well as starting to pay the levy for benefits, which are treated as defined benefit post-April 2015, the PPF has confirmed schemes that fall outside the de minimus exception (ie a 10 per cent move in either direction of the s179 valuation, of more than £5m in absolute terms) will be required to conduct out-of–cycle valuations. These will need to be completed by March 31 2015;

• Schemes that now fall into the scheme funding regime should have appointed an actuary by October 6 2014 if they did not already have one, and will need to complete their actuarial valuation within the allotted timeframe. 

This means for schemes that already do valuations, but have excluded benefits previously considered to be money purchase and that will now be reclassified as non-money purchase, these benefits will need to be included in the next scheme funding valuation.

Schemes that have previously been treated as money purchase will be considered to be new schemes, and will be required to set an effective date for a valuation within 12 months of the coming-into-force date. The valuation must then be completed within 15 months of the effective date, as normal.

But even after taking these actions, issues will remain.

Underpins

There are new definitions of money purchase underpin benefits, cash-balance underpin benefits and top-up benefits.

It is clear from these new definitions on underpins that it is possible for a benefit to flip categorisation from DB to DC, or vice versa, depending whether an underpin bites.

This raises a number of practical issues for trustees. For example, at what date do you test benefits to establish whether an underpin bites and therefore whether to categorise a benefit as either DB or DC?

In the regulations, this test is to be done at the “relevant date”. This is not defined, but the essence is that it is the date on which you need to do the comparison – the Pension Protection Fund assessment date, the scheme valuation date, and so on. It may not be necessary to test benefits at other times. 

The classification will determine what protective regime the benefits come under. For instance, DB benefits will be eligible for the PPF, meaning they must be tested for the purpose of paying the levy and establishing whether they are to be granted protection if the scheme enters an assessment period.

Following the introduction of the Budget flexibilities from April 2015, DC benefits may be taken as flexible benefits whereas DB benefits may not. Therefore, it will be crucial to establish the benefit categorisation before communicating with members regarding options.

Zoë Murphy is a partner at Sackers