Out-Law News 2 min. read

Schemes affected by changes to the definition of 'money purchase benefits' need not revisit most past decisions, says DWP

Upcoming changes will impose onerous regulatory requirements on certain "impure" defined contribution (DC) schemes but affected schemes won't usually need to revisit past decisions, an expert has said.

Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the Department for Work and Pensions (DWP) had recognised that it would be "too much" to expect affected schemes to revisit every past decision. However, the actual exemptions set out by the DWP in its response to last year's consultation were complex and would affect different schemes in different ways, he said.

"No one would benefit from, say, preparing funding valuations for past periods, or unpicking benefits already paid from schemes that have wound up," he said. "But this is a highly complex area. The government's general aim is to be welcomed but the actual exemptions are fiendishly technical."

"Trustees of affected schemes should discuss with their advisers now how their scheme will be affected.They need to assess how the scheme should be administered when the new requirements come into force and what, if anything, needs to be done about past decisions," he said.

Once in force, section 29 of the 2011 Pensions Act will restrict the definition of 'money purchase benefits' so that some schemes which had been traditionally classed as defined contribution schemes will be reclassified as defined benefit (DB) schemes, and become subject to the accompanying regulatory requirements. The new regime will retrospectively apply from 1 January 1997 and will affect those DC occupational pension schemes that have guaranteed investment returns, promised any defined minimum benefit, or paid pensions out of scheme assets, rather than buying an annuity.

The new definition was originally expected to come into force in April; however, this was later delayed in order to give the government sufficient time to develop the transitional provisions set out in last year's consultation. Draft regulations published by the government are now expected to bring in the new definition of 'money purchase' from early July 2014, as announced by pensions minister Steve Webb in parliament in April.

The new definition of 'money purchase' stems from a 2011 Supreme Court decision, in which judges found that benefits subject to a fixed rate of investment return should be classified as money purchase, even if this led to a shortfall in assets compared to liabilities. This raised the possibility that a deficit could arise in relation to these benefits, despite there being no statutory protections in place for members of those schemes.

A DB scheme is a scheme that promises a set level of pension once a scheme member reaches retirement age no matter what happens to the stock market or the value of the underlining investment. A DC (or money purchase) scheme is one in which the final value depends on the performance of the scheme member's individual contributions. Because sponsoring employers of DB schemes bear the risk of any fall in value of the pension investment, DB schemes are subject to stricter regulation including requirements to undergo regular valuations, and to make contributions to the Pension Protection Fund (PPF) to guarantee compensation to scheme members in the event of employer insolvency.

The draft regulations provide that schemes will generally not need to revisit decisions taken before the new definition of 'money purchase' comes into force. There are some specific provisions dealing in detail with protected rights, winding up and statutory debts on employers. Schemes affected by the new definition will have until 6 October 2014 to appoint an actuary.

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