Are you sure you have a Money Purchase Scheme?

The definition of “money purchase” benefits changed on 24th July 2014, trustees and employers may require to review their scheme structure and revisit past decisions as a result.

Section 29 of the Pensions Act 2011 (which amends Section 181 Pension Schemes Act 1993) is now in force (from 24 July 2014) and has retrospective effect from 1 January 1997.

Trustees of money purchase schemes (both ongoing and winding-up) should review their schemes’ benefit structures and check the extent their past decisions are going to be protected or whether corrective action is required within specific deadlines.

What’s changed?

The regulations which make the change address non-money purchase benefits not expressly referred to in Houldsworth and another v Bridge Trustees Ltd and another [2011] (such as underpins, top-up benefits, protected rights and AVC’s in the context of schemes winding up outside PPF).

In summary, benefits will only be ‘true’ money purchase benefits where assets are equal to liabilities and a funding deficit cannot arise.

The detail

There are two key parts, according to whether a pension is in payment or not:

  • New Section 181B (2) sets out that where a pension has not commenced, a money purchase benefit must be such that:

“its rate or amount is calculated solely be reference to assets which (because of the nature of the calculation) must necessarily suffice for the purposes of its provision to or in respect of the member.”

  • New Section 181B(3) sets out that where pension has commenced, a money purchase benefit must be such that:

“(a) its provision to or in respect of the member is secured by an annuity contract or insurance policy made or taken out with an insurer, and

(b) at all times before coming payment the pension was a benefit falling within this section by virtue of [bullet point above]”

The regulations are intended to prevent schemes affected by the changes having to revisit past decisions made on the basis of the trustees’ understanding of the law at the time. (i.e. that the relevant scheme was a ‘non’ money purchase scheme. Past decisions taken by trustees between 1 January 1997 and 24 July 2014 will be retrospectively validated with some exceptions regarding employer debts.

In brief, such circumstances arise where the debt event concerns benefits which are not money purchase under current law, and are not affected by the Houldsworth decision. In these cases the trustees will have to obtain a new valuation and agree a recovery plan within six months. This will not apply where the employer is insolvent.

Other effects of the Regulations

Schemes which were money purchase but became non-money purchase when Section 29 came into force will become subject to the requirement to appoint a scheme actuary under section 47 of the PA 1995 by deadline of 6 October 2014.

On the basis that triennial valuations will be required for such schemes, it is worth noting that where a scheme becomes a “new” non-money purchase scheme the existing payment schedule will continue to be in force until the first schedule of contributions is certified by the actuary.

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.