UK: The Bridge Decision - Money Purchase Or Defined Benefit?

Last Updated: 8 March 2010
Article by Mark Grant

The Court of Appeal handed down an important judgment in Bridge Trustees v Yates today relating to the interpretation of the phrase "money purchase benefits" under pensions legislation. The decision has been an unusually long time coming, with the original High Court judgment given in May 2008 and the Court of Appeal hearing taking place last summer. The potential significance of the case can perhaps be gleaned from the fact that the DWP felt the need to intervene in, and to pay the costs of, the appeal.

The facts

The scheme in question was initially a conventional final salary scheme before being restructured to add different tiers of defined contribution benefit. The company went into administrative receivership in 2003, and the scheme then went into winding-up in the same year.

The trustees brought proceedings relating to section 73 of the Pensions Act 1995, which sets out the order of priority between different types of members (by reference to their benefits) in which assets of an occupational pension scheme should be applied on a scheme winding up, as the legislation stood when wind-up commenced. As the legislation generally excluded assets and liabilities in respect of "money purchase benefits" from section 73 (meaning that such benefits are not liable to be cut back due to a scheme deficit), the court's task was to determine whether a selection of different benefits under the scheme met the definition of money purchase benefits under legislation i.e. "benefits the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of the member".

The Court of Appeal's decision

The Court held that the phrase "money purchase benefits" should not be read too restrictively, but instead construed "in a fair and reasonable way". As such, neither the application of actuarial factors at some stage of the calculation, nor of notional investment returns, were necessarily fatal to an argument that particular benefits were money purchase.

This was despite dicta in a previous case, AON v KPMG, on the facts of which the Court of Appeal had held that "the requisite direct relationship between contributions and benefits is broken by the introduction of actuarial factors". The correct interpretation to apply was "whether, having regard to the combination of all the features in the scheme in question, the rate or amount of the benefit in question can sensibly and reasonably be said to be calculated by reference to the payments by or in respect of the members".

The Court also settled a number of other points that had been raised in the case:

  • it made no difference whether the trustee secured such benefits by means of "internal annuitisation" or by purchase of an annuity on the open market
  • neither the existence of a guaranteed minimum pension (GMP), nor a final salary guarantee in relation to defined contribution accrual, prevented a money purchase pot from representing "money purchase benefits" as defined in the legislation
  • where a member had accrued rights to GMP, only money purchase accrual before 6 April 1997 (when GMPs ceased to accrue) would produce an underpin benefit, with the result that only that part of the money purchase pot would fall within the priority order
  • the "voluntary contributions" given priority under the winding-up order included not only the member's additional voluntary contributions but also any matching contributions made by the employer
  • money purchase "protected rights" assets fell outside section 73 (this was a new point, which had not been raised before the High Court).

Implications

Since 6 April 2005 a revised winding-up priority regime, reflecting the introduction of the Pension Protection Fund, has applied. Bridge therefore has the most immediate relevance for ongoing wind-ups that began before that date. However, there is still plenty for all trustees and employers to digest in relation to wider questions as to when a benefit is "money purchase" because they are still dealt with separately on a winding up and therefore not generally susceptible to being scaled back due to any scheme deficit.

The strictness of the dicta in the KMPG case had been widely questioned, but had the advantage of providing certainty. The new, more pragmatic test as to whether benefits are money purchase means that schemes will have to scrutinise their rules carefully. On the other hand, the Court's answers to the supplemental questions may offer welcome clarification for parties who have been on tenterhooks for nearly two years since the original decision was handed down.

A copy of the judgment can be found here (http://tinyurl.com/ycc3wcr).

If you have problems opening or printing the pdf file above, please click here (http://tinyurl.com/yc46nqp) for help.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 05/03/2010.

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