The new definition of “money purchase benefits” was introduced in response to the Supreme Court case of Houldsworth and another v Bridge Trustees Ltd. One of the effects of this case was that money purchase benefits could include benefits where there was a risk that the pension scheme could incur a funding deficit. This conflicted with the Government’s intended meaning. As a result, the Department for Work and Pensions took action to negate the effect of this decision by providing a new statutory definition of “money purchase benefits” and seeking to legislate retrospectively from January 1997.
The revised definition ensures that benefits will only be money purchase where assets are equal to liabilities and a funding deficit cannot arise. Pension schemes with a guarantee or internal annuitisation option, which are currently treated as money purchase, will no longer be treated as such. Therefore, trustees and employers of these schemes should carefully assess the impact that the changes will have on them.
In order to assist with some of the practicalities and consequential changes of this decision, the Department of Work and Pensions (DWP) launched a public consultation paper and draft set of regulations back in October 2013.
It appears that the Government has listened to apprehensions about the changes as earlier this month, Steve Webb, Minister of Pensions, announced that regulations providing transitional relief for pensions affected by the new definition of “money purchase benefits” will be brought into effect in July 2014.
The Minister confirmed that “schemes will not need to revisit past decisions in almost all cases”.
A further key point, which was clarified by the Minister, was the extent to which the transitional relief will apply retrospectively. Whilst the DWP originally intended to distinguish between steps taken before and after the Bridge Trustees decision, he confirmed that transitional protection will be provided for events, which occur between 1997 and the date the regulations come into force. Therefore, future members of schemes have protection if their schemes are unable to pay benefits that have been promised.
We now await the Government’s response to the public consultation. Once the formal response has been published, Trustees should consider the provisions carefully to fully understand how their schemes will be affected.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.