The Pensions Act 2011 changed the definition of “money purchase benefits”. The change was in response to the Supreme Court’s 2011 judgement in the Bridge Trustees Lts vs Houldsworth and another case which confirmed that certain benefits, such as benefits based on contributions to which a guaranteed return was applied, could be considered “money purchase” even though a deficit could arise in respect of them.
The new definition has not yet come into force, and it still needs to be finalised through regulations. When the new definition comes into force, it can be made retrospectively effective from as early as 1 January 1997. We understand that for some purposes, retrospective effect remains under consideration.
The key point is that some benefits which have hitherto been administered as money purchase benefits will not be considered money purchase benefits any longer. For example, these changes impact on schemes with a guaranteed investment return or schemes that internally annuitise AVCs. Affected Benefits will be brought under the funding regime for DB schemes, including employer debt legislation. These benefits will no longer be treated as outside of the priority order in case of wind-up and will instead be subject to the caps Pension Protection Fund (PPF) caps. We understand that it is the intention of the DWP to change the definition for all purposes and that retrospectivity is under consideration in some respects.
These changes could have considerable implications for the way that pension schemes are run. The Pensions and Lifetime Savings Association has been engaging closely with the Department for Work and Pensions to try to ensure this difficult situation is managed as sensibly and proportionately as possible.