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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.