UK: What Does "Money Purchase" Mean? Some Clarity, At Long Last...

Last Updated: 3 November 2014
Article by Kris Weber

The revised definition of "money purchase" benefits contained in the Pensions Act 2011 came into force at the end of July (this year). While the definition ostensibly applies from 1 January 1997, transitional regulations which came into force at the same time have the effect of limiting its retrospective impact. Going forward the new definition clarifies which benefits are "money purchase"; and, equally importantly, which benefits (that now aren't) are instead subject to the scheme-specific funding regime of the Pensions Act 2004 and, similarly, eligible for PPF protection.

Background

The long-running Bridge Trustees case, finally decided three years ago, concerned certain benefits provided by the Imperial Home Décor pension scheme, such as DC benefits with a guaranteed rate of investment return, that could not be said with absolute certainty either to constitute a "defined benefit", or to be "money purchase" in nature.  The scheme had gone into wind-up some years previously on the insolvency of its sponsoring employer, and its trustees were unclear as to the legal status of the benefits they had to pay.  This in turn affected the amount of benefit that each member would get on the winding-up of the underfunded scheme, hence the trustees applied to court for guidance on that fundamental question.

The Supreme Court decided in July 2011 that the benefits in question were "money purchase", under the statutory definition in force at the time, even though it was possible for a deficit to exist in respect of them.  As a consequence of being "money purchase" those benefits ranked at the top of the statutory priority order on wind-up (and therefore had to be satisfied first, ahead of DB benefits); but equally they were not covered by the scheme-specific funding regime of the Pensions Act 2004, nor eligible for PPF protection on an employer's insolvency.

The DWP's concerns that this could leave many members outside the scope of the PPF (as well as the fact that the UK Government were now in breach of the EU Insolvency Directive) led to a hasty announcement that the law would forthwith be changed, to ensure that any benefit in respect of which a deficit could develop would no longer fall within the statutory definition of "money purchase".  The DWP added that, in their view, this is what that definition had meant – or, more accurately, had been intended to mean – all along.

The new statutory definition and the accompanying regulations are the product, three years later, of industry-wide deliberations over precisely what should constitute a money purchase benefit and what should, instead, fall onto the radar of the scheme-specific funding regime, the PPF, et al.

The new definition

Essentially any benefit that can generate a funding deficit, such as:

-             DC benefits with a DB underpin;

-             DB benefits with a DC top-up;

-             'cash balance' benefits with a guaranteed rate of investment return;

-             benefits of a fixed monetary amount being provided in return for a transfer-in; and

-             DC benefits that are annuitised 'internally' when a member retires and paid as a pension from the scheme, rather than being secured with an external insurance provider;

will no longer be classed as "money purchase".  Such benefits will, accordingly, be subject to the scheme-specific funding regime set out in the Pensions Act 2004; and as they are also now eligible for PPF coverage, the PPF levy will have to be paid by those schemes which provide them.  It is only those benefits, whose value always matches that of the underlying assets, which will now be classed as "money purchase".

The new definition applies with effect from 1 January 1997 (again, to ensure that the UK is not in breach of overriding EU law).  However, the accompanying transitional regulations also make it clear that other than in certain limited circumstances – involving, essentially, members' interests being at risk – important events in the life of the scheme concerned (such as actuarial valuations, wind-ups and section 75 debt calculations) which occurred prior to 24 July this year do not have to be revisited. 

This important concession by the DWP means that, by contrast to the position under the first draft of the new regulations issued a year ago, any such events occurring after the date of the Supreme Court judgment in Bridge (and before the date on which the revised definition came into force) will not have to be unravelled.

Practical steps for trustees

Trustees of any scheme which provides benefits of the sort outlined above (or, in fact, any other benefit with 'hybrid' qualities that could in theory generate a funding deficit), should take legal advice to determine whether any such benefits, that have probably hitherto been thought of as "money purchase", no longer are.

If it does transpire that any such benefits are no longer "money purchase", then they will become subject to scheme-specific funding with effect from July 2014 and trustees will need to conduct a formal actuarial valuation of those benefits by no later than July 2015.  A recovery plan, and schedule of contributions setting out the deficit repair period applicable to any underfunding that the valuation reveals, will then be needed within the normal 15 month time period thereafter.

Perhaps more pressingly, because the part of the scheme providing such benefits will become an "eligible scheme" for PPF purposes as from next April, a 'section 179' valuation will be due in respect of it by the end of March 2015.

There is clearly a lot of work to be done by such schemes, and ascertaining the legal status of the benefits they are obliged to provide is merely a first (albeit very important) step.  Then it's the actuary's turn; and after that, who knows...

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.

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