New statutory definition of 'money purchase' benefits – Check the categorisation of your scheme

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Section 29 of the Pensions Act 2011 introduces a new statutory definition of 'money purchase' benefits.

The new definition will impact on schemes in a number of ways, and the DWP is consulting on regulations to deal with transitional, supplementary and consequential measures to support the introduction of the new definition.

The new definition is required because the DWP's view is that money purchase benefits should never generate a funding deficit. Following the Supreme Court's judgment in Houldsworth v Bridge Trustees and another (Bridge), the DWP announced that it would introduce legislation to clarify the definition of money purchase benefits.

The appointed day for the change is  April 2014, but some of its effects are backdated to the date of the DWP's announcement in July 2011.

The effect of the new definition is that any benefit that could give rise to a funding deficit cannot be a money purchase benefit. That is required to ensure that the UK is complying with its obligations under EU law. It does have some unusual side effects.

The issue in Bridge was that the scheme was paying pensions to money purchase members, using internal annuity rates.

The problem for the UK Government was that it was possible for a funding deficit to arise in respect of those pensions, and under the legislation as it then stood the members would not qualify for assistance from the Pension Protection Fund.

The other major sector identified as being affected is schemes that offer a guaranteed interest rate.

A consequence of the new definition is that some schemes currently regarded as money purchase schemes will not be so; they will be subject to the statutory funding regime, the employer debt legislation and may have to pay a risk levy.

The draft The Pensions Act 2011 (Transitional and Consequential Provisions) Regulations 2014 are intended to ease the introduction of the new definition. For example, they will remove the need to revisit decisions made prior to the 2011 announcement.

Schemes that began to wind up before 27 July 2011 will not have to revisit past decisions. Schemes that become eligible for the Pension Protection Fund will have until 31 March 2015 to submit the first valuation, and will start to pay the risk levy from 2015/16.

They also preserve the effect of the Supreme Court's judgment, so despite the change in the statutory definition, the benefits that were the subject of Bridge will remain money purchase benefits.

Note that the recent Code of Practice 13 issued by the Pensions Regulator expects trustees to understand the nature of their scheme as part of their knowledge and understanding duty.

If you need help assessing whether this might affect you, please speak to your usual contact or any member of the team.