News analysis: Managers of pension schemes that have hybrid elements such as additional voluntary contributions have been urged to investigate the impact of a legislative change that could increase their costs.
The government’s latest consultation on its change to the definition of money purchase pension schemes introduces some relaxations (see box), but will still mean that more benefit structures will be considered defined benefit and thus subject to greater regulatory burdens.
Key points
The definition of money purchase was in the 2011 Pensions Act and will come into place in April 2014.
It will apply retrospectively, but not as far back as originally considered.
Employers will not have to consider debt arrangements prior to July 27 2011.
When these schemes are reclassified they may also trigger an employer debt, meaning employers who were previously part of the scheme could now owe money to it.
Kirsty Bartlett, partner at Squire Sanders, said: “Trustees are going to have to work out if an exemption applies, with section 75 debt. [They should] look at when employers have stopped participating.”
Mitigating the impact
Schemes could start by comparing their benefit structure to the detail of the consultation.
“The first thing is to do is to look at the type of benefits you have in your scheme, and look at if any of those could be affected,” said Zoë Lynch, partner at law firm Sackers.
One example would be a DB pension scheme which had historically let members pay money purchase AVCs that were held alongside the DB benefit.
If, for instance, those schemes had undergone a scheme apportionment arrangement, where a departing employer’s debt was divided among the remaining employers in the scheme, they may have to revisit the calculation if certain benefits had been omitted.
“The AVC will now be considered DB and that would mean if you had a section 75 debt [that] would have been understated,” said Lesley Browning, partner at law firm Norton Rose Fulbright.
But what is critical is how the AVC was treated by the scheme at the time. Some schemes moved towards treating it as a money purchase benefit as tax regulation shifted.
Lynch added: “That practice largely stopped after 2006, when it was possible to use those AVCs [as the] tax-free lump sum at retirement.”
But schemes could hold off on this work, in case the legislation changes, particularly its historical reach.
“I would be drawing this to their attention,” said Browning of her scheme clients, “but not telling them to go off and do the work now, because it might change.”
