Background
In 2011, the Supreme Court found, in the case of Bridge Trustees v Houldsworth and another, that:
- benefits subject to a guaranteed interest rate and
- money purchase benefits which had been converted into a scheme pension
remained money purchase benefits. This judgment raised the possibility that a deficit could arise in relation to money purchase benefits. The Government was concerned that this meant that some schemes provide some element of defined benefits without being subject to legislation such as the scheme funding requirements and without paying PPF levies. Therefore it used the Pensions Act 2011, specifically section 29, to insert a new definition of “money purchase benefits” into the Pension Schemes Act 1993 to ensure that a benefit is money purchase only if it is calculated solely by reference to the assets, meaning that there can never be a deficit in respect of money purchase liabilities.
Regulations
The Government has recently consulted on the introduction of Regulations supporting the commencement of section 29. These Regulations are intended to come into force on 6 April 2014 but will have retrospective effect from 1 January 1997. They are most likely to affect schemes that are, to most intents and purposes, money purchase but which either have guarantees in place or pay scheme pensions on retirement.
Schemes that have begun winding up on or before 27 July 2011 will not have to revisit past decisions; neither will schemes that began to wind up after 27 July 2011 and have settled all members’ benefits in full and completed winding up by the time section 29 comes into force. However, the draft regulations provide that, where the benefits treated as money purchase benefits have not been settled in full, trustees will have to re-calculate employer debts occurring since 27 July 2011 unless:
- the scheme has entered a regulated apportionment arrangement or approved withdrawal arrangement;
- the trustees are satisfied that recalculating would make members less likely to receive their full benefit entitlement or
- the trustees are satisfied that the recovery of the debt could not be made without disproportionate cost.
We are concerned that, not only will the unpicking of apparently completed wind-ups be cumbersome and expensive (and who will pay for this work?) but such exercises may result in some members receiving increased benefits and others reduced benefits
Revaluation and pension increases
Revaluation applied to date will not have to be revisited where cash balance benefits have been revalued by the application of notional interest. In future, cash balance benefits can be revalued in line with the revaluation of active members’ benefits (rather than using revaluation as applicable to final salary benefits).
Where a pension arising from a cash balance arrangement has come into payment without provision for increases in payment, the pension may continue to be paid at a flat rate in future. This is consistent with legislation in force since 3 January 2012 which provides that cash balance benefits do not have to be increased in payment.
Transfer values
The Regulations aim to make it clear that the transfer value of money purchase benefits cannot be reduced to reflect scheme underfunding but that transfer values for non-money purchase benefits (for example cash balance benefits), which can become underfunded, may be reduced to reflect underfunding in that category of benefits.
Scheme funding
Any scheme which finds itself to be a non-money purchase scheme as a result of the legislation will have to:
- appoint a Scheme Actuary within 3 months of the Regulations coming into force and
- to obtain an initial actuarial valuation with an effective date within 12 months of the commencement of section 29.
Pension Protection Fund (PPF)
Schemes that are already eligible for the PPF, and paying the pension protection levy, will not need to revisit past valuations. However, they have in fact overpaid PPF levies to date! That is because benefits deemed previously to be money purchase would have been paid in full prior to the scheme’s admission to the PPF whereas, as non-money-purchase benefits, they will be assumed by the PPF and paid at a reduced rate.
Schemes that become eligible for the PPF will need to submit their first valuation by 31 March 2015 and pay the PPF levy from 2015/16.
Additional Voluntary Contributions (AVCs)
The Regulations provide transitional protection for scheme members who might take their AVC benefits through an internal annuity from their scheme. Such annuities will be treated as money purchase benefits if the scheme enters a PPF assessment period up to 12 months after section 29 comes into force. This will allow scheme trustees to notify members that, if they choose an internal annuity in the future, their benefit will be not be treated as money purchase from that point for PPF purposes and that the compensation they would receive in place of their internal annuity and their scheme pension could be less than the combined total of those two elements.
Equality
The Regulations purport to allow schemes to apply differing actuarial factors for men and women when converting benefits to a rate of scheme pension, although it is difficult to see that this complies with equality legislation!
Underpins
Schemes which contain underpin arrangements will be able to treat underpinned benefits as either wholly money purchase or wholly defined benefit, depending on whether the money purchase fund or the defined benefit has the higher value. This amendment may lead to members receiving less than the value of their money purchase underpin if their scheme transfers to the PPF, if the underpin did not bite compared with their full defined benefits.