What Does 'Money Purchase' Mean? Some Clarity, At Long Last...

The revised definition of "money purchase" benefits contained in the Pensions Act 2011 came into force at the end of July (this year). While the definition ostensibly applies from 1 January 1997, transitional regulations which came into force at the same time have the effect of limiting its retrospective impact. Going forward the new definition clarifies which benefits are "money purchase"; and, equally importantly, which benefits (that now aren't) are instead subject to the scheme-specific funding regime of the Pensions Act 2004 and, similarly, eligible for PPF protection.

Background

The long-running Bridge Trustees case, finally decided three years ago, concerned certain benefits provided by the Imperial Home Décor pension scheme, such as DC benefits with a guaranteed rate of investment return, that could not be said with absolute certainty either to constitute a "defined benefit", or to be "money purchase" in nature. The scheme had gone into wind-up some years previously on the insolvency of its sponsoring employer, and its trustees were unclear as to the legal status of the benefits they had to pay. This in turn affected the amount of benefit that each member would get on the winding-up of the underfunded scheme, hence the trustees applied to court for guidance on that fundamental question.

The Supreme Court decided in July 2011 that the benefits in question were "money purchase", under the statutory definition in force at the time, even though it was possible for a deficit to exist in respect of them. As a consequence of being "money purchase" those benefits ranked at the top of the statutory priority order on wind-up (and therefore had to be satisfied first, ahead of DB benefits); but equally they were not covered by the scheme-specific funding regime of the Pensions Act 2004, nor eligible for PPF protection on an employer's insolvency.

The DWP's concerns that this could leave many members outside the scope of the PPF (as well as the fact that the UK Government were now in breach of the EU Insolvency Directive) led to a hasty announcement that the law would forthwith be changed, to ensure that any benefit in respect of which a deficit could develop would no longer fall within the statutory definition of "money purchase". The DWP added that, in their view, this is what that definition had meant – or, more accurately, had been intended to mean – all along.

The new statutory definition and the accompanying regulations are the product...