Final regulations on reclassifying DC benefits

Introduction

The DWP has published final Regulations following the October 2013consultation on reclassifying DC benefits in the wake of the Bridge Trustees case. The Supreme Court’s July 2011 decision in Bridge Trustees concluded that it was possible for certain benefits to be within the definition of “money purchase benefits” despite there being a potential mismatch between assets and liabilities. The DWP immediately announced that it would legislate to reverse the effect of this decision, with retrospective effect, by introducing a new definition of “money purchase benefits”.

Key points

The main change from the consultation is a limit to the retrospective extent of the Regulations.
This means that, in general, trustees will not need to revisit any decisions taken prior to the Regulations coming into force.
Affected schemes will need to be ready to comply with the provisions relating to both PPF and scheme funding.
The Regulations will come into force in “early July” – later than expected at the time of the consultation “due to the complexity and range of the issues raised.”

Benefit structures need checking

Trustees will need to consider their benefit structures to establish whether any benefits will be affected by the new definition of “money purchase benefits”. The following are all examples of benefits which may have been considered DC in the past but which may now need to be reclassified as DB following the introduction of the new definition of money purchase benefits:

in-scheme annuities, including top ups to DB pensions purchased with DC AVCs
DC benefits with a DB underpin (such a benefit will be treated as DB if the underpin bites)
DC benefits with guarantees.

Whether benefits are classified as DB or DC makes important differences to:

the protections offered by legislation on a wind up
whether or not the scheme funding and employer debt requirements apply
the availability of the PPF.

Retrospection

Retrospection is the key issue dealt with by the Regulations, as the changes to the definition of money purchase benefits in section 29 of the Pensions Act 2011 are expressed to be retrospective back to 1 January 1997. The consultation had provided for certain decisions taken since 27 July 2011 to be revisited but the DWP has now changed its position on this issue. The Explanatory Memorandum, published with the regulations, states that:

“The majority of stakeholders (68 [of 95 total] written responses) were of the view that where schemes had not acted consistently with the Department’s understanding of money purchase benefits, they could incur some costs if required to revisit decisions made after 27 July 2011. This was the date of the Department’s statement of intention to clarify the definition of money purchase benefits. These Regulations take account of this and now validate actions and decisions taken after 27 July 2011 and the coming into force date in all areas.”

This means that, in general, trustees will not need to revisit any decisions taken prior to the Regulations coming into force. The original consultation would have required trustees to revisit certain decisions taken in relation to winding up and employer debt after 27 July 2011.

PPF

Schemes with benefits affected by the Regulations will be eligible for the PPF from 1 April 2015. Schemes will need to be ready to start paying PPF levies from the levy year 2015/16 and will therefore need to submit a PPF valuation by 31 March 2015.

Scheme funding

In terms of scheme funding, schemes with benefits affected by the Regulations will need to complete scheme funding valuations within the allotted timeframe. This means:

for schemes which already do valuations, but which have excluded benefits previously considered to be money purchase which will now be reclassified as non-money purchase, these benefits will need to be included in the next scheme funding valuation
schemes which have previously been treated as money purchase, will be considered to be new schemes – and will be required to set an effective date for a valuation within 12 months of the coming into force date. The valuation must then be completed within 15 months of the effective date, as normal.

Schemes which do not have a scheme actuary will need to appoint one by 6 October 2014.

If you have any queries, please liaise with your normal contact at Sackers to ensure appropriate action is taken.