Out-Law News 2 min. read
01 Nov 2013, 3:08 pm
The consultation, which closes on 12 December, also seeks views on the most cost effective way of implementing the transitional provisions which will prevent schemes having to apply all the new requirements retrospectively. Section 29 of the 2011 Pensions Act, which comes into force on 6 April 2014, restricts the definition of 'money purchase benefits' so that stricter protections apply where an attempt is made to guarantee pension benefits beyond the assets invested in the scheme.
Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that some schemes which had traditionally been classed as defined contribution (DC) schemes would be reclassified as defined benefit (DB) schemes, and become subject to the accompanying regulatory requirements, once the new regime was in force.
"There are a number of schemes that have not been providing pure DC benefits, but which legislation has nevertheless classed as DC," he said. "In July 2011, the DWP decided that those schemes should be classed as DB. By changing the goalposts in this way, the DWP forced those schemes to comply with the complex and onerous regulatory requirements that apply to DV schemes."
"Fortunately, the DWP has realised that it would be too much to ask those schemes to apply all of those requirements retrospectively. No one would benefit from preparing funding valuations for past periods for example, or unpicking benefits already paid from schemes that have would up. But this is a highly complex area: the DWP's general aim is a worthy one, but it is important that all the possible implications are thought through carefully," he said.
As different schemes would be affected in different ways, trustees of affected schemes should "discuss with their advisors now what they will have to do to comply," he said.
A DB scheme is a scheme that promises a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment. A money purchase scheme is a type of DC scheme, in which the final value depends on the performance of the scheme member's individual contributions. This means that the scheme member bears the risk of any fall in the value of the pension investment.
DB schemes are subject to stricter requirements than DC schemes, which are intended to ensure there is no difference between the pensions promised to members and the pension fund available. They must undergo regular valuations and make contributions to the Pension Protection Fund (PPF), which pays compensation to scheme members if their employers go insolvent and can no longer meet their pension commitments.
The new definition of 'money purchase' stems from a 2011 Supreme Court decision, which found that benefits subject to a guaranteed interest rate and money purchase benefits which had been converted into a scheme pension should be classed as such. 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.
The change in the law ensures that only those benefits where there is no risk of a funding deficit can be classed as money purchase schemes, and so subject to DC rather than DB regulatory requirements. The change will mainly affect hybrid schemes which currently class benefits containing guarantees linked to salary or a guaranteed interest rate, or pensions in payment derived from money purchase benefits or cash balance benefits, as money purchase.
When commenced in April 2014, the new regime will retrospectively apply from 1 January 1997. However, transitional and supplementary provisions that are "deregulatory in nature" will remove the need to review decisions made before 28 July 2011. In addition, schemes that have begun winding up on or before 27 July 2011, and schemes that began to wind up after this date but have completed winding up before the changes come into force, will not have to revisit past decisions.