Occupational Pension Schemes and Money Purchase Benefits: Government Consultation

Occupational Pension Schemes and Money Purchase Benefits: Government Consultation

Published:

Author: Suzanne Burrell

The DWP has issued draft regulations for consultation. This follows the change in the statutory definition of money purchase benefits, due to come into force next year.

Following the decision in Bridge Trustees v Holdsworth, the DWP announced that it would amend the definition of money purchase benefits so that only benefits calculated solely by reference to the assets available would be classified as money purchase benefits; meaning that aspects of pensions legislation such as scheme funding, PPF coverage and the statutory priority order on winding-up would apply to benefits traditionally classified as money purchase benefits.

In the Bridge Trustees case, the Supreme Court held that benefits paid from a money purchase scheme still constituted money purchase benefits even when the pension was paid directly from the Scheme and therefore a deficit could potentially arise from payment of those benefits.

The DWP recognised that this potentially left gaps in the legislative regime governing pension schemes and as such, sought to amend the definition of money purchase benefits.

The DWP has issued draft regulations for consultation; with the intention that the amended definition will come into force on 6 April 2014 but with retrospective effect to 1 January 1997.

The aim of the draft regulations is to:

  • give schemes time to comply with the amended definition and to meet the necessary legal and funding requirements attaching to benefits which are not money purchase benefits
  • balance protection for Members against minimising the impact of schemes by ensuring that, in most circumstances, past decisions do not have to be revisited
  • ensure the primary legislation is aligned with the change in definition

The DWP has assumed that most schemes that are affected by the change in definition are likely to be hybrid schemes and has asked for such schemes to provide details to them.

The DWP has indicated that it has been asked by stakeholders about bringing the regulations into force in two stages so that pension protection measures around scheme funding and the PPF come into force first, followed by introduction of measures in relation to benefits in accumulation, deferment or payment.

The DWP indicates that it thinks that it will be difficult to make the distinction due to the interlinked nature of the Regulations. However, it has been suggested to the DWP that a two stage approach will make it easier for schemes to make the necessary changes.

Nonetheless the consultation asks if splitting the Regulations into two stages would be helpful and which Regulations should be delayed.
The DWP has indicated that schemes which began winding-up on or before 27 July 2011 will not have to revisit past decisions, and the Schemes which began to wind up after 27 July 2011 and have completed winding-up by the time the amended definition comes into force, might not have to revisit past decisions.

The DWP say that this easement will not apply if Members' entitlements under a Scheme have not been met in full or the former trustees take the view that further assets may be obtained by re-opening the Employer debt calculation.

Transitional provisions apply in relation to employer debt events which occurred on or before 27 July 2011. Employer debt events which occurred in the period after 27 July 2011 will need to be revisited unless certain conditions are met.

The debt will not need to be recalculated when:

  • the Scheme has entered into a regulated apportionment arrangement or approved withdrawal arrangement; or
  • the trustees or scheme managers are satisfied that recalculation would make Members less likely to receive their full benefit entitlement
  • the trustees or scheme managers are satisfied that recovery of the debt could not be made without disproportionate cost

When a flexible apportionment arrangement, scheme apportionment arrangement or withdrawal arrangement was entered into after 28 July 2011 and before the change in definition comes into force, the trustees will be required to consider whether the funding test or alternative requirements will continue to be met in view of the statutory re-designation in the nature of the liabilities.

Regulations also provide for flexibility around revaluation methods which may have been applied to such benefits when they were assumed to be money purchase benefits. It will be possible under the Regulations to revalue schemes as cash-balance schemes using the flat rate method. Additionally, draft regulations allow the money purchase method of revaluation to be used in relation to cash balance benefits which accrued before the change in definition comes into force.

The Regulations also confirm that increases to pensions already in payment will not need to be revisited. This seems sensible as the basis for converting a member's accumulated funds into a scheme pension will have been taken based on assumptions around pension increases and clearly the cost of providing an escalating pension will always be higher than the cost of providing a level pension.
Schemes already eligible for PPF cover and paying the pension protection levy will not need to revisit past valuations unless Schemes become eligible for PPF cover, they will need to submit their past valuation by 31 March 2015 and pay the levy for 2015/16.

The draft regulations cover underpin arrangements, for example, when a money purchase benefit is only provided if the value exceeds a non money purchase benefit, such as an GMP underpin.

For schemes winding-up, benefits need to be tested so that:
. where the money purchase value exceeds the full value of the defined benefit, the member is a money purchase member
. where the defined benefit value exceeds the money purchase value, the member is regarded as a defined benefit member

Further information about the consultation and draft regulations can be found here:

If you wish to talk through any of the issues raised in this note and, in particular, if the draft regulations present any concern for your scheme, please contact Suzanne Burrell or your usual pensions contact. We would be happy to report back to the DWP on your behalf.