In July 2011, in response to the decision of the Supreme Court in Houldswoth v Bridge, the Government announced that it would be tightening the definition of "money purchase benefits" with retrospective effect from January 1997. The new definition, which is to come into force in July 2014 (the exact date is yet to be confirmed), provides that a benefit is only money purchase where "its rate or amount is calculated solely by reference to assets which must necessarily suffice". In other words, the assets must always match the benefit. 

Benefits previously considered to be money purchase but which, for example, have a guaranteed investment return or a defined benefit underpin, and internal annuities, will no longer be considered to be money purchase benefits. Regulations are being introduced which mean that schemes which have been treating these benefits as money purchase but from July will no longer be able to do so, do not have to revisit past decisions (other than in a couple of very limited circumstances). This means that important events, including wind-ups, section 75 debt calculations, transfer payments, actuarial valuations, benefit revaluations and pension sharing on divorce can generally stand.

The provisions coming into force in July represent a significant change from the proposals published in October 2013 which would in many cases have required steps taken since July 2011 to be unravelled. 

Below is a table summarising the main impacts of the new definition going forward. Schemes affected by the new definition should seek detailed advice.

Underpins and top-ups

The treatment of these benefits depends on the position at each point where the underpin or top-up is tested (e.g. the date of retirement or commencement of winding up). If, on that date, the money purchase benefit is greater than the defined benefit promise, then the benefit will be money purchase. If the money purchase benefit is less than the defined benefit promise then the whole benefit will be treated as a defined benefit. This will require trustees to monitor when underpins and top-ups bite.

Scheme funding

Schemes which have previously been treated as money purchase schemes will be subject to the statutory scheme funding obligations from July 2014 and must produce an actuarial valuation with an effective date of July 2015 at the latest. They then have a further 15 months to put in place a schedule of contributions, etc. 

PPF

Schemes which have previously been treated as money purchase schemes will become "eligible schemes" from 1 April 2015 and must provide their first section 179 valuation to the PPF by 31 March 2015. 

Self-annuitisation

From July 2014, if a money purchase benefit (or a benefit previously treated as money purchase) is self-annuitised, the pension will not be treated as a money purchase benefit and could potentially be scaled down on PPF entry. Trustees will need to explain this to members if they are proposing to offer internal annuities. Trustees are able in certain circumstances to continue to treat self-annuitised benefits coming into payment before April 2015 as money purchase benefits for winding up and PPF purposes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.