NAPF comments on Government's regulations on money purchase benefits

The National Association of Pension Funds (NAPF) has today (Friday) commented on the Government’s long-awaited regulations on the changed definition of money purchase benefits.

The NAPF welcomed the consultation on the Government’s plan to implement the new definition of money purchase benefits and the accompanying new draft regulations but is concerned that retrospective application of the law could involve hidden costs.

Penny Pilzer, NAPF DC Policy Consultant, said:

“The NAPF is pleased that the Government is consulting on the way in which it plans to implement the new definition of money purchase benefits. We understand the Government’s concern that as a matter of EU law, most benefits that include an underlying guarantee should be in some way incorporated into the funding regime and protected by the Pension Protection Fund. However, changes should be limited to those required to comply with EU legislation, and should be prospective and selective.”

The NAPF argues that the decision to impose a new definition of money purchase benefits back to 1997, when there are over 3,000 references to this phrase in legislation, is unnecessarily complex; and that the release of 55 pages of new regulations is disproportionate to the problem the Government is trying to correct. The Government has stated that the regulations will be drafted to ensure that, where treatment of benefits is likely to change, the new law applies only prospectively. However, the NAPF believes that it would be more proportionate to target those areas where a change is needed rather than risking the unforeseen consequences that will accompany a 16-year period of retrospectivity. 

Ms Pilzer added:

“We think that there are important issues of employer and employee expectation that would be better handled as part of the Defined Ambition conversation. We are concerned that “DCPlus” arrangements, such as contributions with investment guarantees, could be subject to three different regimes within the space of a few years, which will discourage employers from adopting such plans in the future.”

Notes to editors:

1. The NAPF is the leading voice of workplace pensions in the UK. We speak for 1,300 pension schemes with some 16 million members and assets of around £900 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.

2. On 27 July 2011, the Supreme Court agreed with the lower court that the statutory definition of “money purchase benefit” does not require a complete match of assets and liabilities. 

3. The DWP had argued in that case that the definition required a complete match of assets and liabilities and that the benefits at issue (AVCs and DC benefits with an investment return) were non-money purchase benefits.  At the time, such benefits  were treated as money purchase benefits by the PPF and others in the industry. 

4. As a result of the case, a new definition of “money purchase benefit” was enacted as section 29 of the Pensions Act 2011. 

5. The new definition makes clear that a benefit will be considered money purchase only where “its rate or amount is calculated solely by reference to assets which (because of the nature of the calculation) must necessarily suffice for the purposes of its provision to or in respect of the member”.    Under the new definition, former money purchase benefits will become non-money purchase and subject to the defined benefit regulatory regime. 

6. The new definition will mostly affect schemes that convert AVCs into scheme pension at retirement.  These are almost always final salary schemes that allow members to buy some “extra pension” with their AVCs.  It will also affect schemes with benefits that are subject to investment guarantees. Under the new regime, these benefits will fall into the PPF if the scheme is unable to pay benefits at PPF levels on an insolvent wind-up.  They will be subject to PPF caps on payment.

7. The new statute states  that the definition would have retrospective effect back as far as 1997, but the Secretary of State was given broad powers in sections 30, 32 and 33 of the Pensions Act 2011 to amend the language of the Act, to make different provision for different cases, to include transitional, supplementary and other provision and to apply various other powers to shape the way the definition was applied.

 
8. The new regulations are 55 pages long.  For the most part, the purpose of the new regulations is to mitigate their retrospective effect and ensure that the benefits continue to be treated as they have been treated for most purposes. 

Contacts:

Dee Sullivan, Head of Media and PR, (interim), 020 7601 1717 or 07917 506 683, [email protected]
Aimee Savage Richards, Press Officer (interim), 020 7601 1718 or 07825 171 446, [email protected]